Dollar strengthening brings more inflation and reduces Brazil’s potential GDP
The US currency has already accumulated a 17% appreciation since the low of the year
After the Brazilian real registered a strong appreciation against the dollar at the beginning of the year, driven by high commodity prices and the attraction of resources from foreign investors, over the last few months, the situation reversed sharply.
After touching the low of BRL 4.61 in mid-April, compared to BRL 5.57 in December 2021, the US currency embarked on an almost uninterrupted path of strengthening against the real, having closed the trading session this Tuesday. feira (19) quoted at R$ 5.41, which corresponds to an increase of approximately 17.3% since the lowest closing of 2022.
The appreciation of the dollar tends to inflate an inflation that is already at very high levels in Brazil, with potential impacts on the conduction of monetary policy by the BC (Central Bank), and for the recovery of economic activity.
According to market experts, a combination of external and country-specific factors contributed to the recent movement in the exchange rate.
On the international scene, the interest rate hike initiated by the Federal Reserve (Fed, US central bank) to combat persistent inflationary pressure in the region, further accentuated by the Russian invasion of Ukraine, makes more investors look to the US market. to allocate its resources, as the yields offered by the bonds issued by the US government increase.
In Brazil, the new fiscal policy maneuvers of the Bolsonaro government in an attempt to gain some momentum on the eve of the elections, most recently with the approval of the PEC of Benefits, also weigh in favor of a devaluation of the real, with an increase in the perception of the Brazilian real. local market risk from the point of view of investors.
For Luca Mercadante, economist at asset manager Rio Bravo, the main consequence that a weaker real brings to the Brazilian economy is an increase in inflation, which has been running at very high levels in the country for some time.
With the dollar more expensive, the products that the country imports from the United States automatically also rise in price, which is reflected in a general increase in goods traded in the Brazilian market, explains Mercadante. “The high dollar ends up causing the United States to export inflation to other countries.”
The IPCA (Extended National Consumer Price Index) registered an increase of 0.67% in June, with inflation accumulated in 12 months reaching the mark of 11.89%.
“The situation of rising interest rates in the United States, in a context of greater aversion to risk with the prospect of a slowdown in the global economy, ends up culminating in the appreciation of the dollar”, says the economist, adding that in times of greater uncertainty on the part of of investors on a global scale, it is common for there to be a massive migration to assets considered the safest on the market, with the dollar being one of the main alternatives in the range of options.
The Rio Bravo economist also says that, in a global environment that is no longer one of the most favorable for riskier assets, Brazil suffers even more due to uncertainties about the sustainability of public accounts, whether due to recent fiscal maneuvers by the government. Bolsonaro who once again pierced the spending ceiling, whether due to doubts about the conduct of economic policy from 2023 onwards, regardless of who wins the elections.
More interest and less growth
Chief economist at Truxt Investimentos, Arthur Carvalho, says that, in a scenario of more pressured dollar and inflation, the BC may have even more work to be able to control the rise in prices, eventually having to extend the process of monetary tightening more than expected. today on the market.
Most market agents work with an increase of 0.50 percentage point in the basic interest rate, the Selic, to 13.75% per year, according to expectations collected by the BC for the Focus bulletin.
However, having confirmed the transmission of a higher dollar to current inflation, Carvalho does not rule out the possibility that the monetary authority will have to make some more adjustments, taking the Selic rate to levels around 14%.
Truxt’s chief economist also says that an even higher interest rate puts additional pressure on the cost of borrowing for households and businesses, in a scenario in which defaults are already at record levels, and therefore with a probable negative impact on the pace of recovery of economic activity.
Carvalho adds that, although commodity exporters are traditionally benefited by a stronger dollar scenario, this time the phenomenon is not repeated. “This is due to the accommodation of raw material prices in the international market, in the face of the deceleration of the great global economies, either by the high interest, or by the mobility restrictions imposed again by China”, says the expert.
He also says that the growth dynamics of the Asian giant ahead will be an important point to be monitored to understand the direction of commodity prices and exchange rates in Brazil from now until the end of the year.
The Truxt economist estimates the currency’s price oscillating within a band around BRL 5.40 to BRL 5.50 over the next few months, with a more conservative view in relation to market pairs – in Focus, the projection The average of economists points to the dollar at R$ 5.13 in December.