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The foreign exchange market was once again defined by the global strengthening of the dollar. Escalating tensions in the Middle East heightened risk aversion and drove up energy prices, while U.S. inflation accelerated again in May, reinforcing the perception that interest rates will remain higher for longer in the United States. This scenario led to a rise in Treasury yields and reduced appetite for emerging market assets, putting pressure on the real. Despite relatively favorable domestic fundamentals, the external environment dominated currency dynamics last week, resulting in the appreciation of the U.S. dollar against the real, even amid expectations of a possible agreement to end the conflict.

The yield curve, in turn, rose again throughout the week, especially for longer maturities, reflecting a combination of external and domestic factors. Internationally, the escalation of geopolitical tensions in the Middle East also pushed up oil prices and increased the perception of global inflationary risk. Domestically, the prospect of the Selic rate remaining at a high level for an extended period and fiscal uncertainties helped sustain the rise in future rates, particularly at the long end of the curve. The May IPCA released on Friday reinforced this scenario.


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