Effects of Brazil Real Fall Against Dollar

By Maria Lopez Conde, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The Brazilian real continued its downward spiral this week, closing at R$2.1734 on Monday, its lowest value since May 2009. As Brazilian industries start anticipating some positive short-term effects of a stronger dollar on the economy, consumers are going to feel the decreased purchasing power.

Dollar's Rise Affects Trade, Consumer, Rio de Janeiro, Brazil News

A weaker Brazilian real might cut into consumers’ purchasing power, photo image recreation.

Brazilian commodity producers, according to Neil Shearing, chief emerging markets economist at the London-based research firm, Capital Economics, will also benefit from the stronger dollar.

“Commodity companies may benefit in the short-term from a weaker currency, since their exports are priced in U.S. dollars and a weaker real increases the local currency value of these exports,” Shearing told The Rio Times. Brazil is one of the world’s largest commodities exporter, producing soybeans, coffee and iron, among others.

In fact, Vale, the country’s mining giant and biggest exporter, announced last week that a weaker real against a robust dollar may compensate for increased production costs and a sluggish growth in China, one of the firm’s main buyers.

“The Brazilian currency will devalue even more,” argued José Carlos Martins, Vale’s executive director, in an interview at the company’s Rio de Janeiro headquarters last week. “The slowdown in China is negative, the devaluation is positive. Not only because our costs in dollars will be reduced, but because the investment will also be smaller.”

The dollar’s strength should also help agricultural production, which are some of Brazil’s key exports. The president of the Brazilian Rural Society, Cesário Ramalho, told the agriculture news outlet, Canal Rural, that an exchange rate above R$2.10 to the dollar is “healthy” for the agriculture sector.

Rio de Janeiro, Brazil News

Companies that export commodities, like Brazil’s mining giant Vale, will see more competitive prices with a stronger U.S. dollar, photo by Noora Ojala/Flickr Creative Commons License.

“When it was at R$1.70 [the exchange rate] was extremely cruel, but the brusque variations worry me intensely,” Ramalho explained.

Nevertheless, the real’s tumble has stoked inflationary fears from those who believe foreign products will become even more expensive in Brazil as a result of a weaker real.

“In theory, a weaker currency can push up inflation by increasing the cost of imported goods,” Neil Shearing said. “But in practice, there is not much of a link between movements in the exchange rate and fluctuations in inflation in Brazil,” he explained, adding that this is partly due to the fact that Brazil is a relatively closed economy and imports account for less than fifteen percent of GDP.

However, Shearing warned that the commodities sector might only see short-term positive outcomes. Commodities companies “won’t see a major improvement in competitiveness as a result of a weaker real,” Shearing explained. “Instead the main benefit in the long-run will be for manufacturers, which have struggled over the past five years or so.”

According to O Globo, the effects of a weaker real are already echoing amongst Brazilian tourists looking to travel abroad. The dollar’s rise in recent weeks – 7.04 percent in the month of May alone – has led tourists to refrain from buying U.S. dollars.

In Rio de Janeiro, where dollar sales have dropped about fifty percent since May, some exchange brokerage firms have begun offering special deals to move the greenback. Others have opted to follow the market’s trend and keep the American currency high, selling at nearly R$2.28 at some exchange houses last week.

Pioneer, an exchange brokerage company in São Paulo, told Globo that it has not seen a dip in demand for the American currency, especially for those who are planning to travel abroad. “With a ten-point increase, people lose R$100 for every US$1,000 they buy. For those who are traveling, it is not much,” the firm said.

Foreign tourists visiting Brazil; however, are set to benefit from the favorable exchange rate, which will effectively yield more reais for less dollars. The story is different for Brazilian consumers, already burdened with high inflation and cost of living. They are set to feel the pain once again, as Shearing predicts “the major losers will be consumers who will see their purchasing power in overseas markets eroded.”

11 Responses to "Effects of Brazil Real Fall Against Dollar"

  1. Alex Maturein  June 19, 2013 at 5:57 AM

    Oh dear the major losers here will be consumers who see their purchasing power eroded in overseas markets – I wonder how many of Brazil’s population are worried by that???

    The rioting on the streets yesterday is all about costs at home and nothing to do with buying abroad – and then President Dilma says she is proud of the rioters – is that a serious response from the captain of the ship?

    I am worried about the seriousness of this government in Brazil – looks like the Brazilian miracle is slipping away

  2. Brazilian Englishman  June 20, 2013 at 9:02 PM

    I have often said to my beautiful Brazilian wife of the past 5 years, that I am astounded at the way Brazilians in general do not question when things are not right.

    Well with the latest protests, low and behold the younger population is now asking in the form of protests:-

    1) Why are we the highest taxed country in the world?
    2) Why is our electricity so expensive?
    3) Why do we accept the corruption that is rife from the ground up, to the very highest echelons of power.
    4) Why should we accept the drug dealers and gangs in our communities.
    5) Why should we accept the expenses of the Confederation Cup, The World Cup and the Olympics, when we do not have good state education for our children, when we don’t have good state health and aid for ourselves.
    6) Why should we accept the fact that state systems don’t work, why don’t we change them to a model that does work?
    7) Why spend millions on the football Cups and Games when we do not have an infrastructure that can cope with our population, never mind when we have god knows how many million tourists here as well.
    8) Why do we accept that politicians are immune from prosecution when they have clearly robbed the population and country of millions and are still doing so on a daily basis.

    These are just some of the questions that the younger generations are now asking and believe me it can only bode well for Brazil, that they now have the courage to ask.

    Being able to ask, is the right of every democratic society who advocates the right of free speech.

    Lets hope that Brazilia and president Dilma take notice.

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  6. John Chalmers  August 7, 2013 at 9:30 AM

    I fully endorse the comments of the Brazilian Englishman. I live in Amazonas and have suffered from corruption. Near us is a boatyard where the ownwer is able to continually build new motor yatchs which are permanently rented to the government. In ten years I have rarely seen them used.
    Around this boatyard a group of residents have illegally walled off public access to the beaches and gated the roads. Even after a judgement against them the walls are not bulldozed. One Marina owner has concreted the beach and although fined the concrete remains.
    At the lower end of the scale the workers abuse the workers courts for unrealistic claims when sacked. I would never employ any body now in Brazil ,and any body investing in Brazil wants their bumps felt. Brazil may be rich but most are poor. Even if the government releases money for social projects most is stolen by the hierarchy who seem to have immunity to prosecution.
    Normal Brazilians still fear authority, stemming from a previous brutal military regime , but thing will change. There will be more demonstrations and politicians should remember Rumania.

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