Dollar Weakens Against Real Despite U.S. Tariffs and Inflation Concerns

The dollar continued its decline against the Brazilian real for a second consecutive session on Tuesday, closing at R$5.7678, a 0.31% drop.

This occurred despite the United States imposing a 25% tariff on aluminum and steel imports. Investors focused instead on inflation trends and Federal Reserve Chair Jerome Powell’s remarks, which shaped market sentiment.

Globally, the dollar showed weakness as the DXY index, which measures the currency against six major global counterparts, fell 0.37% to 107.951 points by 5 p.m. Brasília time.

Domestically, Brazil’s January inflation data played a significant role in influencing currency movements. The Broad Consumer Price Index (IPCA) rose 0.16% in January, slowing from December’s 0.52% increase.

Over 12 months, inflation stood at 4.56%, remaining above the central bank’s target ceiling. Bank of America analysts attributed January’s slower inflation to reduced residential electricity tariffs tied to Itaipu’s energy bonus program.

However, they noted that low unemployment levels might delay further disinflation despite signs of economic deceleration in high-frequency data.

Brazil’s Monetary Policy Outlook

Monte Bravo economists emphasized that persistent inflationary pressures could prompt Brazil’s Central Bank to maintain a firm monetary policy stance.

They projected a likely 50 basis point hike in May, potentially raising the Selic rate to a terminal level of 14.75% annually. The real also benefited from rising commodity prices, which offset concerns about U.S. trade tariffs.

Nomad Research Manager Paula Zogbi highlighted that the tariff measures, set to take effect in March, leave room for potential adjustments or delays in implementation. On the international front, Powell’s Senate testimony further weakened the dollar.

He indicated no urgency to cut U.S. interest rates, currently at 4.25%-4.50%, citing strong economic fundamentals and significant progress toward policy goals over the past two years.

Powell clarified that while the Federal Reserve does not comment on trade policies like tariffs, it focuses on responding to their economic impacts. Market participants are now awaiting U.S. Consumer Price Index (CPI) data due on Wednesday.

Traders are assigning a 37% probability of year-end interest rates falling to the 4.00%-4.25% range. This is up slightly from 35% before Powell’s comments.

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