On Thursday, the US dollar saw a slight uptick against the Brazilian real, closing up by 0.11% at R$4.9797.
This mild increase came even as the dollar strengthened globally. Investors reacted to the Brazilian Central Bank’s cautious tone in its recent monetary policy announcement.
The dollar’s rise to R$4.9797 came amidst a broader 0.80% increase against a mix of six major developed country currencies.
US economic strength initially reduced risk interest worldwide. Yet, the Brazilian Central Bank’s recent update balanced this.
It now forecasts a 0.50 percentage point rate cut in May, a shift from its earlier, more aggressive cutting strategy.
Analysts see this as a cautionary move, signaling possible slower Selic rate reductions. Leonel Mattos from StoneX views this as boosting Brazilian assets’ appeal.
This mix of fewer Brazilian cuts and expected US cuts could draw more foreign investment to Brazil.
The Brazilian Central Bank has reduced the Selic rate by 0.50 points to 10.75% annually, marking its sixth consecutive cut.
Meanwhile, the Federal Reserve kept its rate steady. Despite higher than expected inflation, 10 of 19 Fed officials foresee a reduction of at least 0.75 points by year’s end.
This consistent expectation since December suggests a careful approach to US rate adjustments.
The gap in interest rates between Brazil and the US enhances the real’s attractiveness for “carry trade.”
In such trades, investors borrow where rates are low and invest in higher-rate markets, profiting from the rate disparity.