Dollar hits record low since November in week marked by COPOM and Fed interest decisions

RIO DE JANEIRO, BRAZIL – The dollar closed at its lowest level in over 3 weeks on Friday, capping a fourth straight drop to go below R$5.50 at the end of a week marked by a tighter Central Bank monetary policy and expectations of ample liquidity worldwide with low interest rates in the United States.

The real took turns with the Turkish lira as the currency with the best global performance this session, after the Central Banks of Brazil and Turkey surprised with higher-than-expected interest rate hikes in the past two days.

The Brazilian currency rose 1.4% in the week, while in Turkey -whose Central Bank promoted an interest rate shock with an increase of 200 basis points in the rate- the lira jumped 4.8% in the week. The US Central Bank’s milder approach to inflation also helped, boosting expectations of interest rates being kept close to zero for several years – a scenario that favors emerging markets.

In Brazil, the Monetary Policy Committee (COPOM) raised the basic interest rate SELIC by 0.75 percentage points, to 2.75% per annum, in contrast to the expected 2.50%. The Central Bank has signaled further hikes in the SELIC rate. Analysts assess that the Central Bank’s signal is positive for the exchange rate, but they consider that the real remains under the influence of other factors.

Evidence of the instability that still prevails in the foreign exchange market, on Friday the dollar ranged between R$5.565 (-0.04%) and R$5.4492 (-2.12%).

Bernardo Zerbini, one of AZ Quest’s macro strategy managers, recalled that the exchange rate behavior is greatly influenced by the currency’s performance abroad.

“It is difficult to state that the dollar (abroad) is going to weaken. The US will grow much more than other countries. Regarding Covid, while everything abroad seems to be at a standstill, in the US vaccination is underway. The US are likely to be the first country to get back to normal life,” he said.

The dollar index was up 0.1% this session and hit a 9-day high.

João Leal, Rio Bravo economist, pointed out the setbacks to the exchange rate arising from the fiscal aspect, saying that this factor prevents the dollar from dropping below R$5.30 or R$5.35.

“There shouldn’t be much improvement in the country’s fiscal situation until the end of the year,” Leal said. “In September and October the electoral process will be very intense. That will contribute to keeping the exchange rate (dollar) higher.”

The spot dollar fell 1.50% on Friday to R$5.4839 on sale, the lowest level since February 24th (R$5.4219). The currency had not seen a drop for four consecutive sessions since the four straight dips between November 4th and 9th last year.

Friday’s relief drove the dollar to a 1.36% devaluation in the week’s accumulated figure. The currency is down 2.12% in March, but still up 5.63% in 2021.

Itaú Unibanco notes that the news about the evolution of the pandemic in Brazil will remain on investors’ radar next week. “In this context, debates on decreeing a state of public calamity will be closely monitored.”

Decreeing a state of public calamity in 2020 freed the government from meeting fiscal targets and allowed for an explosive increase in spending to tackle the pandemic. As a result, the federal government’s primary deficit reached a record R$743.087 billion, 10% of Gross Domestic Product (GDP), further exposing Brazil’s fiscal distress, which has been affecting local markets for years.