Cheaper pound does not attract Brazilians. Worth to buy?

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The pound sterling has tumbled about 20% against the dollar this year and is at its lowest since 1985. A quarter of that drop has occurred since last week as the market reacted badly to a tax cut package that boosts the UK’s debt. United Kingdom in the midst of an inflationary crisis.

Although the price of the pound represents a financial barrier for Brazilian tourists traveling to Europe to cross the English Channel, the fall of the British currency has not resulted so far in a significant growth in demand for the currency in exchange offices in Brazil, according to a survey by the Abracam (Brazilian Exchange Association).

“The pound sterling is down almost 6% since last week, but there still hasn’t been much demand for the currency,” said Kelly Massaro, president of Abracam.

“Due to the proximity of the European winter, Brazilian travelers fear gas distribution problems in Russia and the demand for tourism has not increased, despite the devaluation”, he commented.

In retaliation for economic sanctions imposed by the European Union on Russia after the start of the Ukrainian War, Russian President Vladimir Putin is threatening to stop the operation of the main gas pipeline that supplies the central region of the European continent.

If, on the one hand, Brazilian tourists seem little interested in buying pounds, on the other hand, demand for the euro is heated, according to Abracam. “Regarding the euro, since June we have noticed greater demand than for the dollar,” said Massaro.

Despite the increase in interest in the euro, however, the demand for the dollar is still a little higher in relation to the European currency in the accumulated of 2022. “We estimate a proportion of 55%, for the dollar, to 45%, for the euro”, commented.

Tourist can expand purchase, but without exaggeration

Despite the historic fall of the British currency, buying large amounts at once for a trip in the distant future is risky. The recommended strategy is the average exchange rate. This means making periodic purchases — one per month, for example — and in equal amounts until the date of travel.

Buying a little more of the currency in a downturn can help in the strategy of getting a slightly more advantageous average rate, guides Ricardo Amaral, president of Western Union Brazil.

“The ideal is to make the stock over time”, says Amaral. “Of course, there are moments of sharp drop and you can take advantage of it if you have a little more resources.”

For those who are wondering if it is worth buying pound now, the answer is yes, but in moderation.

Although tourists can even increase the value of their monthly purchase at this time, they must persist in the strategy to form an average price, as this would avoid serious losses in the event of further strong falls in the foreign currency.

Amaral recommends that tourists stock up on remittances for redemption abroad, rather than accumulating cash at home. It’s a security issue.

For this, it is necessary to verify if the exchange office has a correspondent abroad. In this case, the customer sends and collects at the destination, presenting the numbers of the deposit slips and the passport.

The IOF (Tax on Financial Operations) charged in this modality is 1.1%, the same applied to the purchase of foreign money in cash. It’s a lower rate than the 6.38% for purchases abroad with a credit card.

It is still possible to use a bank account abroad to carry out this planning. The IOF is also 1.1%. It is important to check, in this case, if the bank offers the possibility of making the withdrawal in countries that do not use the dollar or the euro as currency and if this operation has an additional cost.

Why are hard currencies falling

The pound has been falling sharply this year, but the UK currency is not plunging alone. The euro has already fallen by around 15%. The yen, the currency of Japan, has also already melted close to 20%. With the exception of the group of currencies of the largest global economies, the real still sustains a slight gain against the dollar this year.

The exchange rate movement reflects the unfavorable environment for the growth of companies and, consequently, a greater risk of devaluation for the shares traded on the Stock Exchanges. Investors seek safety in dollar-linked assets, particularly US Treasury bonds.

The soaring inflation in several parts of the world is responsible for this fear about the direction of the economy. To curb price indices, central banks are aggressively raising interest rates. The measure increases the cost of financing for companies and credit for consumers.

The ball of the moment is the pound. The currency was in evidence due to fears that the UK will have great difficulty in holding back inflation. That concern gained traction after the new finance minister, Kwasi Kwarteng, announced the biggest tax cut package in 50 years. The plan, which will be financed by the increase in debt, was announced last Friday (23).

Kwarteng is borrowing tens of billions of pounds to fund his plans, heating up the economy as the Bank of England raises interest rates to rein in inflation.

The British central bank has an annual inflation target of 2%, but the British consumer price index is currently at 9.9% for the 12 months to August.

It is as if the central bank’s monetary policy and the government’s fiscal policy are heading in opposite directions, explains Antonio van Moorsel, a partner at Acqua Vero Investimentos.

“The measures aim to boost consumption and reduce the chances of a British recession. However, the package contracts more inflationary pressure ahead, which raises the risks of a monetary tightening. [alta de juros] even more aggressive from the Bank of England,” said Moorsel.

There is consensus in the market on the need to make credit more expensive to withdraw money from circulation.

This is the main measure adopted by central banks in an attempt to curb global inflation, which began due to failures caused by the pandemic in global supply and worsened with the War in Ukraine.

It is the dose of medicine to fight inflation that is scaring investors. Strong interest rate hikes could drive the global economy into a recessionary scenario.

In times of threats to the economy, investors seek safety in Treasury bonds from countries with strong currencies, with US debt papers being considered the safest. Market participants often say that the risk of a US Treasury default is zero.

In addition to insurance, these papers are also offering higher returns because the Fed (Federal Reserve, the US central bank) is aggressively raising its benchmark interest rates, also to contain historic inflation in the country.

With many signs of recession looming, investors are taking their dollars from investments scattered around the world and taking them to the US Treasury. This makes the US currency more scarce and consequently appreciated against its peers.

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