The US dollar fell an iota short of crossing the R$ 6 barrier after measures announced by the Brazilian Government of President Luiz Inácio Lula da Silva raised uneasiness in South America's largest country Thursday. The local currency has fallen 23.4% this year and 3.36% this week alone.
Thursday's 1.30% devaluation left the quotation at R$ 5.98, a new all-time high since the real began circulating in 1994 amid turbulences from Finance Minister Fernando Haddad's latest announcements. It was also reported that, at some point during the day, the psychological R$ 6 barrier was pierced.
Brazil's financial market received with pessimism Haddad's fiscal package which had been expected for weeks, consisting of a cut in public spending that will allow the Government to save R$ 70 billion reais (US$ 11.8 billion) over the next two years. The measure also seeks to cap some social benefits, military pensions, and the so-called super-salaries of some officials, among other adjustments.
The dollar's upward trend had already been driven by expectations surrounding Haddad's tax package, which brought volatility to the local scene, also hit by foreign factors such as US President-elect Donald Trump's protectionist policy and geopolitical tensions, including conflicts in the Middle East.
Haddad's fiscal adjustment package was expected to be an antidote to the rising dollar and growing investor distrust. However, it was deemed as palliative and insufficient to contain the country's fiscal imbalance.
In addition to the surge in the dollar, the futures yield curve also rose, pricing in the possibility of more aggressive increases in the Selic rate. Interest rates could reach 14.25% in the coming months to contain inflation, which the rise in the dollar could boost.
The negative reaction also reflects a growing perception that the government faces considerable challenges in maintaining fiscal balance in a scenario of high interest rates and spending restraint as uncertainty is believed to have reached Brazil to stay for a while. Hence, the exchange rate will remain a variable of concern.
Top Comments
Disclaimer & comment rulesI seem to recall, this is how it started in Argentina.
Posted 3 days ago 0No doubt Braz will say ‘no, no everything is actually rosy, however we shall see how this progresses.
A rapidly devaluing currency is generally followed by an equally rapid increase in inflation.
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