Dollar Drops Sharply, Back Below R$5.50 After Powell’s Speech

After rising nearly 2% the day before in Brazil, the dollar fell another 2% on Friday to below 5.50 reais, as the US currency fell across the board abroad after Federal Reserve Chairman Jerome Powell defended the start of interest rate cuts in the US.

The spot dollar closed down 1.97%, trading at 5.4795 reais. However, the currency still gained 0.22% over the week.

At 5:23 p.m., the front-month dollar futures contract fell 2.14% to 5.4875 reais for sale.

Highly anticipated by global markets, Powell’s appearance at the Jackson Hole symposium has strengthened bets that the Federal Reserve will actually begin cutting interest rates in September.

Powell argued this morning that “the time has come” for the Fed to cut interest rates, as rising labor market risks leave no room for further weakness and inflation is on track to hit its 2% target. In effect, this was an explicit endorsement of monetary easing.

“The upside risks to inflation have receded. And the downside risks to employment have increased,” Powell said. “It is time to adjust policy. The direction forward is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

In response to Powell’s speech, investors sought riskier assets, such as stocks and emerging market currencies, which caused the dollar to fall globally.

In Brazil, after reaching a high of 5.5843 reais (-0.10%) at 9 am, the spot dollar at the opening of the session reached a low of 5.4745 reais (-2.06%) at 4.24 pm.

“Brazil’s local issues were pretty much put aside today after Powell said it was time to change interest rates,” said Correparti Corretora director Jefferson Rugik. “That took the market off the hook and investors went looking for risk assets.”

A lower interest rate in the United States favors the interest rate differential for Brazil, which becomes more attractive for international investments.

In addition to Powell, the move in Brazil’s exchange rate was the result of some rebalancing, according to Rugik, following the dollar’s rally the day before.

Domestically, the main question remains whether the Central Bank will raise the Selic base rate in September, as expected by the market. The probability of a 25 basis point increase in the Selic in September is 90%, according to the pricing of the Brazilian forward curve. There is another 10% chance of keeping the rate at 10.50% per annum.

“If the CB does not raise rates at the next meeting, the real should depreciate further and long-term rates should rise,” said Paulo Gala, chief economist at Banco Master, in a commentary sent to clients. “If the CB does not raise interest rates, the market will rise on its own,” he added, referring to the possible effects on the curve.

At 5:21 p.m., the dollar index – which measures the performance of the U.S. currency against a basket of six currencies – fell 0.78 percent to 100.670.

In the morning, the Central Bank auctioned off all 12,000 traditional currency swap contracts in order to roll over the October 1, 2024, maturity date.

Source: Terra

Rose

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