By Cristiane Quartaroli
At the end of last year, the exchange rate exceeded US$/R$ 6.20, reflecting the global uncertainties related to the presidential transition in the United States and the absence of a clear sign of greater fiscal rigor in Brazil. This scenario generated strong pressure in the market, with the dollar registering a significant increase. However, the beginning of this year has brought signs of relief, especially in recent weeks. Although the risks mentioned above still persist, some changes in the outlook contributed to the appreciation of the real, among which we highlight: 1. Donald Trump’s signal in search of a rapprochement with China and 2. the recess of the National Congress, which temporarily reduced the internal political noise. As a result, the dollar exchange rate retreated to the range of US$/R$ 5.90. The big question that is up to us now is whether this initial relief will be consolidated or if we are facing a brief pause in the face of new turbulence. We will put some hypotheses in the next paragraphs to try to unravel this mystery.
The first question that does not want to be silent is whether or not there is the possibility of drawing a parallel between Trump’s first term and the current administration. Remember that Trump led the US economy between 2017 and 2020, with a stone, that is, a pandemic, in the way. This period was marked by significant fluctuations in key assets, especially in the exchange rate, which reflected both internal and external factors. To give you an idea, at the beginning of Trump’s first term, the dollar was quoted close to US$/R$ 3.25 and, at the end of his term, it was already quoted at US$/R$ 5.20 (already in a pandemic).
Among the main factors that influenced the behavior of the exchange rate here in Brazil in this period, we can highlight:
1. On the external side: the economic policy implemented by Donald Trump during his first term was marked by significant measures that impacted both the American domestic scenario and the global market. One of the main characteristics of this policy was the adoption of protectionist practices (hello, I think we’ll have it again!), exemplified by the trade war with the Asian giant, China. This strategy involved imposing tariffs on various imported products, which resulted in economic tensions between the two countries and generated volatility in financial markets around the world. In addition, Trump promoted tax reforms in the United States, which included significant tax cuts for companies and individuals. These measures, aimed at stimulating the domestic economy, also had the effect of strengthening the dollar in the international market, influencing global competitiveness and the dynamics of economic relations between nations.
2. On the domestic side: the political and economic scenario faced by Brazil was marked by significant instability, with uncertainties related to structural issues, such as the reformed Social Security, which generated prolonged debates and uncertainties regarding its approval and long-term fiscal impact. In addition, several fiscal crises in some states have aggravated the situation, highlighting the fragility of public finances at different levels of government – a caveat made to the pandemic. On the economic front, the country experienced an internal crisis characterized by a slow recovery in economic growth and a high unemployment rate. Factors that directly reflected on the quality of life of the population and on the confidence of the consumer market – the confidence indicators were greatly impaired at that time. These factors, added to the moments of risk aversion in the global scenario, led to the outflow of foreign investors, which contributed to the decrease in available capital, increased volatility in the domestic financial markets and pressure on our exchange rate.
3. Globally: finally, we cannot fail to mention that the pandemic in 2020 intensified the devaluation of the real, with capital flight to safer currencies, such as the dollar.
In 2025, exchange rate volatility should remain one of the main concerns of the markets, reflecting the uncertainties associated with the Trump administration – we already felt it now in January. Unlike the Republican president’s first term, which was marked by sharper currency fluctuations, this time there are factors that can contribute to moderating the impacts of a very significant rise in the foreign currency. Among these factors, the interest rate differential favorable to Brazil stands out. With a higher Selic rate compared to FED funds in the United States, the country becomes more attractive to international investors, helping to contain the currency devaluation. In addition, there is the expectation (or would it be hope?) that the Brazilian government will adopt a more austere stance in the fiscal field. Recent signs point to a greater commitment to the control of public accounts, which may reinforce confidence in the real and reduce pressure on the exchange rate.
Despite these theoretically more positive conditions, the scenario remains uncertain and subject to significant variations, especially due to factors that are more difficult to predict, not to say impossible. Thus, it will be crucial to closely monitor the political and economic developments in both the US and Brazil to assess how these elements will interact in the exchange rate context throughout the year. To give you an idea, the projections for the exchange rate, according to the Central Bank’s Focus survey, are still at a level above the current exchange rate, being US$/R$6.00 for the end of this and next year. In other words, everyone is still on the back foot about this scenario.
In fact, there is still a lot of water to roll until the end of the year and, when it comes to the beginning of the Trump administration, excitement will be guaranteed. It remains to be seen if the behavior of the dollar here in Brazil will be more penalized by the volatility typical of an old new American government, as happened between 2017-2020 or if it will benefit from the inflow of capital expected by having a higher and more attractive interest rate from the point of view of investors. For now, the only certainty we have is that we are not sure of anything!