Brazilian currency started weakening against the dollar again, following wave of appreciation that took it to R$5.70 from R$6.18 in late 2024
02/25/2025
The dollar’s exchange rate to the real had seen a significant drop at the start of this year, averaging R$5.70 last week from R$6.18 at the end of 2024. Now it’s back up at R$5.80. What exactly weakened the greenback and why is it rising again?
The Central Bank’s analysis indicates the dollar’s exchange rate has been reacting mainly domestic fiscal news, American economic policy developments, and interest rate spreads, according to the minutes from the latest meeting of its Monetary Policy Committee (Copom).
It appears that the real’s straightening against the real until last week was linked to more favorable external conditions. The weakening yesterday and today coincides with news suggesting that the Lula administration may expand fiscal and credit policies to prevent a sharper economic downturn.
Estimates from economists reveal conflicting explanations for the dollar’s decline until last week. Bradesco released a study attributing the weakening dollar to a softening of risks connected to domestic factors in Brazil.
Meanwhile, economist Livio Ribeiro, a partner with consultancy BRCG and researcher at the Brazilian Institute of Economics at Fundação Getulio Vargas (FGV Ibre), ran his exchange model at the request of Valor and concluded that the dollar weakened against the real solely due to external factors.
The Central Bank believes the primary force behind the real’s appreciation originated from abroad. Monetary Policy Director Nilton David, himself a currency expert, stated at a Bradesco event on February 21 that understanding the exchange rate’s dynamics requires examining what is affecting the real, not just the dollar.
“In December, we witnessed a high level of uncertainty emerging from all sides, which caused significant currency fluctuations,” Mr. David said. “In fact, the dollar moved more than other currencies, and some currencies ended up having higher betas.”
As explained by the Central Bank director, beta measures how much an asset’s price–in this case, the dollar–moves when a benchmark price changes. For instance, when Brazilian stocks fall some may decline more due to greater sensitivity to overall market fluctuations.
According to him, as uncertainty decreased, prices adjusted accordingly. “This process wasn’t exclusive to Brazil,” he said at the Bradesco event. “In fact, I don’t believe it was Brazil. The real pivot was abroad. Of course, each country has its idiosyncrasies that might amplify it or not.”
Bradesco, in a study released last week, noted that up until February 17 of this year “slightly over 80% of the Brazilian currency’s appreciation was driven by domestic factors.”
To reach this conclusion, the study analyzes the evolution of various factors that can influence the exchange rate, such as the prices of exported and imported goods and the interest rate spread between the U.S. and Brazil.
However, defining what constitutes an internal factor versus external factors that affect the risk appetite for Brazil is an artform. It could be that the real benefited from a lower risk perception by foreign investors. Mr. David’s argument is that volatility has decreased since Donald Trump’s inauguration, and volatility is measure of. It could also be that the evolution of Brazilian domestic issues made the country less risky.
To differentiate between these, Bradesco’s economists examine the behavior of currencies from other emerging countries affected by foreign investor risk perception.
The choice of this group of countries is a crucial detail, as the selected group can influence the results. Bradesco used South Africa, Chile, Croatia, Hungary, Indonesia, Mexico, Peru, Poland, Thailand, and Turkey.
Mr. Ribeiro calculated for the period from December 30 to February 17. During this period, various factors acted to lower the dollar against the real. Terms of trade–that is, the prices of our exports–rose by 5.2%, an emerging market risk perception indicator fell by 0.28%, and the index measuring the dollar’s strength against the rest of the world decreased by 1.4%.
However, the indicator which experienced a steep drop of 14.4% to 273 basis points was Brazil’s risk as measured by the credit-default swaps (CDS). When distinguishing domestic from external factors, there is an important difference. According to Mr. Ribeiro’s calculations, of the 7.5% fall of the dollar against the real during the period, 8.39 percentage points were due to external factors.
Domestic factors actually hindered the real, exerting an upward pressure of 0.49 percentage points. During the period, the interest rate spread between the U.S. and Brazil decreased, creating an upward pressure of 0.37 percentage points.
Since Monday, February 24, the market appears to be driven by domestic factors. This morning, February 25, the real is the weakest currency among 33 emerging market countries. It will take a few more days for this to be confirmed by economic models, which require more data to for more precise answers.
*By Alex Ribeiro, Valor — São Paulo
Source: Valor International