Dollar trades below R$5 for the first time in a year but then rises

RIO DE JANEIRO, BRAZIL – The dollar posted a sharp decline against the Real (R$) in early trading on Wednesday, June 16, falling below 5 reais for the first time in more than a year. After reaching the minimum of R$4.994 at 1:30 p.m., it stabilized and then rose to R$5,06 at the close.

The depreciation of the U.S. currency comes before the decision of monetary policy in the United States and Brazil. With the prospect that the U.S. Federal Reserve will keep interest rates near zero and the Brazilian Monetary Policy Committee (Copom) will raise the Selic rate by at least 0.75 percentage points, widening the interest rate differential between the two countries, fixed income investments in Brazil are becoming more attractive.

“This makes the carry trade more attractive, that is, to move money abroad with lower interest rates, and even more so to Brazil, where interest rates are rising significantly. The dollar’s fall today is based entirely on the movements of Brazilian and U.S. monetary policy,” says Jefferson Laatus, chief strategist and co-owner of Laatus Group.

In the foreign exchange market, the real has been the best performer among international currencies, second only to the Seychelles rupee’s appreciation against the dollar.

For Sidnei Nehme, managing director of foreign exchange brokerage firm NGO, the U.S. currency has room to fall further against the Real if interest rates rise in Brazil. “With the interest rate adjustment, the dollar will adjust its price to the effective Brazilian reality and possibly return to the range between R$4.60 and R$4.80,” he says in a note.

According to BTG Pactual Digital, the Selic rate, currently at 3.5%, is expected to reach 6.5% by the end of the year. The projection, which was 5.5%, was revised to take into account the resumption of economic growth expected in the second half of the year.

“This stronger-than-expected activity environment has anticipated our expectations,” the research team said in a report. In the Brazilian Central Bank’s latest Focus bulletin, the market’s median expectation for the Selic at the end of 2021 was 6.25%.

Since the end of April, the dollar has accumulated a decline of about 8% against the Real. During this period, in addition to higher interest rates, factors such as a lower perception of fiscal risk, higher commodity prices, better growth prospects, and the financing of Brazilian companies abroad contributed to the appreciation of the Real.