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What’s going on with the Dollar vs. Brazilian Real (USD/BRL)?

What’s going on with the Dollar vs. Brazilian Real (USD/BRL)?

The US Dollar (USD) has been outperforming most fiat currencies in the last 10 years, with the Brazilian Real (BRL) sitting in the 27th position among the worst performers globally, and in the 4th position among the G20’s worst performers against the USD. During this time, BRL has lost over 55.4% of its value against the dollar.

In a shorter time frame, the Brazilian Real was able to recover part of its losses, with a meaningful retrace from the all-time high of 1 USD priced at R$6.00 in the forex market in May 2020.

By March 2022, one dollar was worth as low as R$4.58, but 2023 is already telling a whole different story.

Notably, the US Dollar has reached its highest value in the last six months against the BRL. It is now being traded for as high as R$5.17, at the time of publication. This move means an increase of over 10% since its lowest at R$4.69 per USD in August.

USD/BRL price chart, 1D, on ICE (Forex).
USD/BRL price chart, 1D, on ICE (Forex). Source: TradingView

Nevertheless, the most aggressive spike happened from September 18’s price of R$4.85 per dollar to current values on October 5, representing gains of 6.54% for the USD against the Brazilian Real.

Why is BRL under pressure?

The financial market can hardly be explained by isolated events observed in a vacuum. Financial outcomes are usually a result of multiple combined factors involving micro and macroeconomics.

However, the most notable event, that led to the spike of 6.54% by the USD against the BRL, was the second cut in a row for Brazil’s interest rates — with its leading indicator, the SELIC, dropping 50bps from 13.25% to 12.75% on September 20.

Moreover, both last interest rate cuts in Brazil happened at the same time the United States was increasing and keeping its own interest rates unchanged. Leading to imbalances in the forex market, favoring the US Dollar, over the Brazilian Real.

Despite some analysts expecting the USD to reach new historical highs against the BRL —  possibly being priced above the R$7.00 per dollar mark in the near future —, official projections by the Brazilian Central Bank still forecast the US Dollar at R$5.00 by the end of 2023.

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