This Wednesday marked a significant moment: the United States dollar soared to R$ 5.30, reaching its highest point in 15 months.This spike is tied to fears over Brazils fiscal policy, especially potential changes that could scrap taxes on certain imports under the Green Mobility and Innovation Program.The Brazilian real has steadily lost ground, depreciating by 9.22% recently.
This decline stems from unexpected delays in United States interest rate cuts.Originally, seven cuts were anticipated in 2024 alone; now, we might see no more than two by years end.Other central banks, like Canadas and the ECBs, are slashing rates more aggressively.
Consequently, the dollars strength could be more than a fleeting trend.United States Dollar Hits 15-Month High Against the Real.
(Photo Internet reproduction)Analysts suggest that the reals woes come from smaller interest rate differentials with the United States This makes carry tradesborrowing at low rates to invest in higher-yielding placesless appealing.Mesquita explains that a strong dollar often coincides with the United States outperforming other economies.The Federal Reserve may also be battling inflation or geopolitical unrest during such periods.
These factors currently suggest a pricier dollar moving forward.A milder rate-cut cycle in the United States , juxtaposed with clearer signs of easing inflation in other developed nations, widens the rate differential.
This has bolstered the dollar since the year started.The future of the dollar hinges on policy divergences between the Fed and other major central banks.Ita isnt hopeful for a weakening dollar, predicting just four Fed rate cuts by 2025, fewer than the ECBs expected seven.The market anticipates slightly different numbers, with five Fed cuts and four from the ECB by the cycles end.Ita sees the dollar gaining an average of 1.5% based on these projections.Brazil Faces Dollar SurgeThis is troubling news for Brazil.
The dollars rise impacts the real economy due to its tight correlation.Ita adjusted its year-end exchange rate predictions upward, from R$ 5.00 to R$ 5.15 for 2023 and from R$ 5.20 to R$ 5.25 for 2025.The consensus among economists has shifted too, from a 2023 forecast of R$ 4.95 to R$ 5.10.
More pessimistic estimates suggest R$5.40 is possible.Some experts hinted at even stronger end-of-year dollar rates due to seasonal trends in profit remittances.In 2022, Brazil saw its largest fund outflow in December, totaling $13 billion.This year, however, a positive trade balance of $4.6 billion has partially cushioned the impact of foreign capital exiting the financial system.