It’s not just in Brazil. All the world’s main currencies took a beating from the dollar this Friday:
- Real: -1,40%
- Mexican peso: -1.12%
- Euro: -0,40%
- Colombian peso: -0.38%
- Australian dollar: -0.30%
Here the dollar closed the session with an increase of 1.3% to R$5.868, at its highest level since May 2020.
READ MORE: Dollar at R$6.00 and pressure on interest rates: the contagion of the ‘Trump trade’ to Brazil
What explains this movement is the proximity of the American election, which takes place on Tuesday. And the growing chances of Donald Trump being the winner. And, more than that, there is also a Republican victory in the Senate – which would certainly help the former president, if elected, to approve the measures he has been defending. They are:
- Tax cuts – can be a stimulus for consumption and consequently, inflation; Furthermore, the measure could lead to a drop in revenue and greater pressure on debt;
- Deregulation of the economy – a strategy that meets the interests of some economic sectors, especially technology, and which can unlock business and contribute to economic acceleration;
- More aggressive tariff policy – by restricting imports, competition in many sectors tends to decrease and, as a consequence, prices rise;
- Immigration restrictions – fewer immigrants can mean less labor and, consequently, have effects on wages in some segments of the economy.
All of this together would mean a huge increase in protectionism in the United States and, consequently, more inflation and more interest. And this would spill over to the whole world.
With the increasing risk of this scenario coming to fruition, according to electoral research, investors are looking for forms of protection, explains Adauto Lima, chief economist at Western Asset. And buying dollars makes sense, because a stronger American economy, as Trump wants, tends to increase the value of the country’s currency.
The market protected itself to enter the election period, because it understands that the Trump scenario could bring significant policy changes
Adauto Lima
The curious thing is that this effect goes against what Trump wants. “Trump is concerned about protecting foreign trade, and this strong dollar could hinder the Republican’s own strategy”, observes Lima.
It is not just the dollar that reacts to this risk. Long-term future interest rates have soared around the world. In Brazil, contracts traded on B3, with maturities from 2025, exceeded 13%, reflecting the fear that, with a Trump victory, the world will once again live with inflation and higher interest rates.
But it is clear that this contagion effect affects those who are most vulnerable the hardest. And this is, without a doubt, the case in Brazil. Here, markets have been reacting to the lack of confidence in fiscal policy. And this explains the worse performance of local assets in relation to the rest of the world. “We were already at a worse level than other emerging markets, and we ended up suffering more from this negative external environment”, he defines.
To try to understand how much of this exchange rate movement is a domestic effect and what comes from abroad, Lima compared the performance of the real to some currency groups. If the real had changed in line with the average of the Latin American currency group, the dollar exchange rate today would be R$5.53, he notes. If the Brazilian currency had followed the average performance of the group of emerging currencies, the real would be at R$5.23. But if it had evolved in accordance with the group of currencies linked to commodity-producing countries, then the dollar would be worth R$5.10.
The worse performance of the real became more evident between April and May, when the government changed the fiscal target for 2025 – from a primary surplus of 0.5% of GDP to zero deficit – and there was also a decision to cut interest rates with a split score. within the Copom, which was understood as a risk of political interference in the Central Bank. At the time, the BC cut the Selic by 0.25 points, but four directors appointed by the Lula government voted for a larger cut, of 0.5 points.
There is a global movement towards risk aversion, which is affecting the dollar and interest rates. But a good part of this high level of the dollar is our fault.
Adauto Lima
