Dollar posts highest weekly rise since March with Fed moves and Brazil fiscal worries

RIO DE JANEIRO, BRAZIL – On Friday, two U.S. Federal Reserve officials expressed their interest in starting to discuss cutting liquidity.

The dollar closed at its highest level in over two weeks on Friday, marking the largest weekly gain in nearly two months, with investors reflecting the strength of the U.S. currency abroad, but also following local political movements aimed at the 2022 election.

A stronger U.S. economy could lead to more inflation and add to the ranks of those who see rising prices as a factor that will force the U.S. Federal Reserve bank (Fed) to reduce the supply of liquidity earlier than expected.

Less liquidity means fewer dollars in the system, which tends to increase the price of currency. The reduction in the supply of cheap money often takes its toll on emerging markets, which because of weak domestic savings need to import dollars to close their accounts.

The conviction that the Fed may reduce its support gathered strength after the North American Central Bank reported in its minutes on Wednesday references to future discussions about a cut in monthly bond purchases. In Brazil, the dollar rose 1.17% on that day, an appreciation that added to Friday’s guaranteed the currency’s gain in the accumulated for the week.

“Now there are signs that the Fed is getting ready to signal some adjustment in its monetary policy,” said Dan Kawa, CIO at TAG Investimentos. “There is no doubt that we are heading to a new stage in the economic cycle, where growth is still showing signs of recovery, but inflation is starting to threaten,” he added.

On Friday, two Fed officials expressed their interest in starting to discuss cutting liquidity. The calls came on the same day that data showed U.S. manufacturing activity in May grew at the strongest pace since 2009, according to preliminary data.

The stronger performance of the U.S. economy – seen over the past decade – is traditionally a catalyst for a strengthening dollar.

Overseas, the dollar index was up 0.2% on Friday, pulling away from four-month lows hit earlier in the trading session.

In Brazil, the currency rose 1.51% Friday to R$5.3554 on sale. It is the highest level since May 5 (R$5.3652) and the sharpest daily appreciation since last May 12 (+1.55%).

The dollar spent virtually the whole day on an upward curve, hitting the lowest level of the day in the morning (R$5.2713, a slight 0,08% drop). At its peak, reached about an hour before closing, it hit R$5.356, a gain of 1.52%.

In the week, the dollar rose 1.58% – the second consecutive week of growth and the strongest rise since the week ended March 26 (+4.68%). In the following weeks, the greenback repeated six declines, rising in the last two.

In May, the currency cut its loss to 1.40%. In 2021 so far, the dollar is up 3.16%.

In this session, the market also monitored the news about political movements toward 2022. The meeting between ex-presidents Luiz Inácio Lula da Silva and Fernando Henrique Cardoso for lunch this week attracted attention, while historic PSDB and PT party leaders are rehearsing a careful approach with an eye on a second round of voting next year in which President Jair Bolsonaro may be defeated.

Under pressure from several sides – including from a Pandemic CPI (investigative committee) in the Senate -, Bolsonaro has raised his tone again in recent days, as he sees his popular approval ratings at their lowest since his government’s inception.

Political risks are cited by investment banks as one of the main factors holding back optimism about the exchange rate, since they directly affect the prospects for the reform agenda – seen as crucial by the market – with the consequent impact on public accounts.

Citi, for instance, recommends buying Brazilian reais, but only tactically – that is, seeking gains with price distortions in the short term. In the coming months, the bank’s professionals see the exchange rate returning to R$5.58 per dollar, mainly due to fiscal concerns – Citi projects public spending to exceed the spending cap by as much as 2.0% of GDP.

“Looking ahead, domestic fiscal risks remain high…In addition, our global outlook supports the view that the dollar should strengthen through year-end,” the institution added, citing that the Fed may begin some stimulus reduction later this year.

Source: Infomoney

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