To drop or not to drop, that is the question

Predicting where the exchange rate will head in the short, medium, or long term is arguably more complicated than Hamlet’s reflections on life, death, and the meaning of existence in his famous, profound, and philosophical monologue. But we are Brazilians (and economists), and we never give up. So, here we are, another year later, in another report, trying to guess the true meaning of existence—or rather, where the dollar is headed by the end of this year, which, by the way, is not that far off.

Well, the question we receive most often is: what will the exchange rate be at the end of the year, or the end of the month, or the day? Regardless of the timeframe, everyone working in foreign trade or holding investments and family abroad wants to know the future exchange rate, whether in the short, medium, or long term. Our quick answer is always the same: we don’t know! In fact, the exchange rate is one of the most difficult variables to project—far more so than Hamlet’s thoughts—whether due to the technical characteristics of the market or because the evolution of the exchange rate involves so many other variables and events that can change everything in a matter of seconds, even a change in the weather forecast. In other words, it is entirely random, a play that can be interpreted in many different ways, with completely different endings.

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However, an economist worth their salt (especially a Brazilian one) is never satisfied with a lack of predictability, murky scenarios, or the possibility of things going off the rails unexpectedly. To prevent this, we like to map out scenarios and assign probabilities to them. That is exactly what we will do in this report. It is something we have done in previous years, and it serves to help us unravel which path our main character will take and what the final scene of this trajectory will be. Shall we?

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To outline our scenes—or rather, our scenarios—we will start from an average exchange rate observed throughout September, which was approximately US$/R$ 5.38.

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Scene 1 – To be: In this scenario, the external environment begins to show signs of relief: the U.S. government eases or removes tariffs imposed on other countries, and inflation slows more clearly in developed economies, allowing central banks—like the Fed and the ECB—to continue their interest rate cutting cycles. This movement tends to direct part of the financial capital flows (speculative or otherwise) toward emerging economies—Hello, Brazil! In Brazil, the downward trend in inflation would continue, although still above the target midpoint, but enough to provide room for the Central Bank to begin gradually reducing the Selic rate later this year. However, the expected decline would be more moderate than many analysts project, due to lingering fiscal uncertainties. On the fiscal front, it is assumed that the government will manage to keep the fiscal framework under control through spending cuts or the containment of non-mandatory expenses, the approval of fiscal responsibility measures, and progress on structural reforms (tax, administrative, etc.), even if not everything is implemented quickly. This political/fiscal stability would reinforce investor confidence. With this combination—falling external interest rates, easing domestic inflation, and advancing reforms—Brazil’s potential growth would improve slightly. Thus, our main star, the exchange rate, would see a gradual appreciation by the end of the year, possibly reaching around US$/R$ 4.60–4.80, depending on the degree of market enthusiasm.

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Scene 2 – Or not to be: Here, central economies still face some dilemmas. Although there is improvement in inflation data, some shocks may arise, such as price increases due to U.S. tariffs, geopolitical tensions, or supply-side effects, which could delay more significant interest rate cuts. Monetary authorities (in the U.S. and Europe) express concerns about persistent inflation in services or inflation expectations that are not fully anchored. This uncertain external environment creates risk for emerging markets like Brazil, which, even with domestic inflation slowing (partly due to lower regulated or food prices), finds its Central Bank forced to maintain a more cautious stance. In other words, interest rate cuts may only begin in early 2026. On the fiscal front, reforms continue to appear but are delayed or partial—there is political dispute, difficulty in reaching consensus, and fiscal risk remains relevant. Growth projections are more contained: Brazil grows, but at a modest pace. As for the exchange rate, our main character, the real, remains under some pressure, fluctuating within a range of moderate depreciation against the dollar, between US$/R$ 5.00 and US$/R$ 5.20, depending on external waves of uncertainty or risk aversion.

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Scene 3 – That is the question:  In this scenario, there is no sustainable improvement in central economies. Shocks (whether supply-side, geopolitical, or cost-related) persist or intensify, the U.S. government resorts to a more aggressive round of tariffs, inflation resurges in many countries, and central banks must pause their interest rate cutting cycles or even raise rates to contain pressures. In Brazil, these external impacts are compounded by domestic tensions; inflation shows signs of a "second wave," mainly in service prices and imported inputs due to rising global costs resulting from the more aggressive tariffs. Inflation expectations become unanchored; the Central Bank is forced to keep the Selic at a high level (at 15% p.a. or perhaps even higher if there is stronger pressure). Interest rate cuts are practically unfeasible in the short term. On the fiscal side, there is a lack of consensus or delays in reforms, growing pressure on mandatory spending with an eye toward the 2026 election cycle, and a risk that the fiscal framework will be insufficient to accommodate adverse shocks. Growth projections deteriorate, with expectations of growth below 2% or even stagnation, depending on the magnitude of the external imbalance. This would be reflected in a stronger dollar against the real, in a range between US$/R$ 5.70 and US$/R$ 5.90, with high volatility.

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Conclusion: Ultimately, what we want to show here is that there is more than one possible ending for our protagonist, who may even jump from one scene to another in the middle of the show, depending on which scene the reader prefers to choose (see the summary table). We tend to believe that the scenes from Scenario 2 will be predominant until the end of this year, with days where we will have more optimistic actors and others not so much. In a way, this is what we have observed since the beginning of this year—an improvement in the perception of the Brazilian economy as a whole. Projections for the main macroeconomic indicators have improved, GDP is expected to grow more than was expected at the beginning of the year, inflation is easing, and projections for our exchange rate are as well. However, we still have a very high interest rate, one of the reasons that contributes in some way to the inflow of capital (even if speculative) into Brazil, allowing for relief in our exchange rate. We believe this behavior may continue over the coming months. But, as it is always worth emphasizing, the one thing economists are best at is getting projections wrong! So, dear readers, feel free to choose the scene that suits you best, because no one really knows for sure. Just ask Hamlet!

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