Another chapter of: why is the dollar falling?

CAUSE: The real has been appreciating against an international backdrop that combines a weaker global dollar with slightly better domestic fundamentals—almost across the board. In the United States, the government shutdown, coupled with renewed uncertainty over the future of interest rates, persistent inflation, and the lack of labor market data, has reduced the appeal of American assets, favoring emerging market currencies. At the same time, China continues to show some resilience, supporting commodity prices and benefiting exporting countries like Brazil. Domestically, the Central Bank has maintained a cautious stance with interest rates remaining high, which widens the interest rate differential compared to other economies and attracts foreign capital inflows—a factor that has strengthened the exchange rate and placed the real among the best-performing currencies this year.

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CONSEQUENCE: But what is the short-term impact of all this? The consequences of this currency appreciation are numerous. On one hand, it helps curb inflation, especially for tradable goods, assisting in the downward revision of inflation forecasts, as we have seen recently. On the other hand, the appreciation of the real, combined with high interest rates, could weaken economic activity in the medium term, especially if the fiscal outlook deteriorates again, as is expected in 2026, an election year. This could reverse some of the recent gains, reigniting pressure on prices and interest rates in the future—the president taking office in 2027 had better be prepared! Brazil, therefore, is in a moment of transition—benefiting from a stronger currency and monetary credibility, but still vulnerable to political and fiscal risks.

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