Brazil's real strengthened for the fifth consecutive session on Wednesday (25/02), closing at 5.12 to the U.S. dollar, as investors weigh a weakening American currency against the backdrop of Brazil's high interest rates and prospects for future fiscal reforms.
The sustained appreciation of the real comes amid a broader depreciation of the dollar, which has been under pressure due to what some analysts describe as erratic U.S. economic policy and institutional instability.
Sérgio Vale, chief economist at MB Associados, told reporters of CNN Brasil Money that external factors are a primary driver for the real's recent strength. "We've been seeing this movement since last year because of developments in the United States," Vale said. He cited the U.S. fiscal scenario, tariff policies, and "consistent attacks" on the U.S. Federal Reserve as factors that have "helped devalue the American currency."
As a consequence, emerging market currencies, including the real, have benefited. Brazil's high interest rates have also made the country an attractive destination for short-term capital inflows.
Domestically, while Brazil continues to grapple with a "very complicated fiscal scenario," there is a market expectation that necessary adjustments will be made following the upcoming presidential election. "There is this expectation, this tendency that whoever becomes president next year will have to make some fiscal adjustment," Vale noted.
He contrasted this with the political landscape in the United States, where he sees a "near impossibility at this moment of bringing the Democratic and Republican parties together to make this fiscal adjustment happen."
Brazil's strong commodity sectors, including agriculture, mining, and oil, along with recent structural reforms in pensions and labor, also contribute to attracting foreign capital. However, Vale cautioned that the appreciating real poses a risk to the competitiveness of Brazilian exporters.
The agricultural sector, in particular, faces a challenging year. "The revenue for agribusiness this year tends to fall a bit compared to last year because of this worsening scenario we're seeing now, a slightly smaller harvest, a lower exchange rate, stable prices," Vale explained. "This configuration is not positive for a sector that is also suffering from cost pressures."
Looking ahead, Vale believes the trend of appreciation for the real is likely to continue in the short term. He suggests that a BRL/USD exchange rate of 4.00 is a possibility in the medium term, potentially by 2027, contingent on a strong fiscal adjustment plan being implemented. However, he ruled out such a level for the current year, anticipating volatility from elections in both Brazil and the United States.
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