See 3 reasons for the fall of the dollar

The dollar touched down at R$4.85 this Wednesday (23), maintaining a downward trend observed since the beginning of the year. The devaluation of the exchange rate results from the alignment of conjunctural conditions favorable to the entry of the American currency into the country.

Cheap shares on the Stock Exchange and high interest rates attract foreign investors to invest in fixed and variable income.

The appreciation of raw materials produced in Brazil, mainly oil, also makes the country stand out among the alternatives for investors interested in the commodities sector.

Brazil can supply some of the demand for some of the commodities exported by Russia, which faces sanctions for invading Ukraine.

Understand in three points how this favorable scenario for the fall of the dollar emerged:

1 – Real and Bolsa lose value during the pandemic

In March 2020, the beginning of the Covid-19 pandemic marked the rise of the dollar from a level of R$ 4.50, to which it has not returned so far.

In moments of uncertainty, investors seek shelter in US Treasury bonds, considered safer. Emerging economy countries, such as Brazil, are seen as risky and, therefore, the first to suffer from the outflow of dollars towards more solid economies.

The dollar remained above R$ 5 until June last year, when for the first time in the pandemic it fell to R$ 4.90. The decline was a result of the increase in the basic interest rate (Selic) by the Central Bank, with the aim of trying to curb inflation.

When the BC raises the Selic, it raises the interest rate paid by Brazil on Treasury Bonds, which attracts more foreigners to the country, valuing the real.

This cheaper dollar period, however, was short-lived. The political turmoil in the country, with demonstrations of a coup character promoted by supporters of President Jair Bolsonaro (PL) on September 7, made the market react. The dollar jumped from R$5.17 to R$5.32 between the eve and the post-holiday of Brazil’s Independence Day. The Stock Exchange deepened a downward movement.

In the following months, the government made efforts to obtain resources to increase the monthly amount of Auxílio Brasil. The income distribution program replaced Bolsa Família, created during the administration of former president Lula, Bolsonaro’s main rival in the dispute for the Planalto in 2022.

To cover the new expense, the government circumvented the spending cap rule. The measure was assessed by the market as a threat to the country’s fiscal responsibility.

2 – Global investors look for cheap assets

At the end of 2021, global inflation took first place in the ranking of investor concerns. The Fed (Federal Reserve, the central bank of the United States) was about to increase the country’s benchmark interest rates, which had been zero since the beginning of the pandemic.

The increase in credit is the main action taken by the monetary authority to contain the highest inflation recorded in the country in 40 years.

Anticipating the rise in interest rates, international investors began to sell highly valued stocks during the pandemic due to the stimulus policies adopted during the pandemic by the Fed and other central banks in developed countries. They began to see a scenario of devaluation of the stock market due to the reduction of liquidity caused by the monetary tightening.

American interest rates began to rise in March of this year. The increase of 0.25 percentage point, placing the reference rate in a range between 0.25% and 0.50% per year, still represents little close to annual inflation, which exceeds 7%.

While interest rates do not rise enough to make US fixed income more attractive, global investors have started to look for undervalued assets with growth potential. This is the case of the Stock Exchange and the Brazilian currency, excessively depreciated in recent months due to internal risks and also due to fears generated by the pandemic.

Financial market experts define whether a company’s shares traded on the stock exchange are expensive or cheap through the relationship between the price of these assets and the company’s projected profit.

It is based on this foundation that analysts say there is room for the stock market to grow and, consequently, for the dollar to fall to R$ 4.50, a level before the pandemic.

3 – Interest and commodities attract investors

The Brazilian Stock Exchange has two segments with great potential to attract foreign investors: commodities and finance.

Oil and iron ore form the flagship among the raw materials exported by the country, with oil company Petrobras and mining company Vale being the companies with the greatest weight on the Ibovespa, the stock exchange’s reference index.

These commodities have been gaining in value for months as economic activity is expected to resume as the advance of vaccination reduces the chances of severe disruptions to supply chains.

Especially in the case of oil, the decision of OPEC member countries (cartel of the main producers of oil and derivatives) not to accelerate the increase in production had already been causing price increases since the second half of last year. But it was the war in Ukraine that sent the price of the commodity soaring to the highest level since 2008.

After a period of strong fluctuation, there was growth in the shares of Brazilian exporters. The appreciation of commodities became an important factor for the fall of the dollar. These commodities are traded in dollars and naturally represent a gateway to foreign currency.

But rising oil is also making fixed income even more attractive.

When announcing the increase in the basic interest rate (Selic) to 11.75% per year, last week, the Copom (Central Bank’s Monetary Policy Committee) also signaled the possibility of even more aggressive increases in interest rates in a scenario of Brent oil barrel high. The price is currently around US$ 120 (R$ 590).

Analysts point out that, given this Copom placement, the Selic rate should close 2022 above 13%.

Brazil currently has one of the most advantageous interest rate differentials in the world. This is how investors classify the relationship between the credit rate and inflation expectations, estimated by analysts consulted by the Central Bank at 6.59% for this year.

It is a condition that favors the carry trade, which is what the market calls the practice of borrowing cheaply in countries with low interest rates and investing in markets with a greater possibility of return.

High interest rates, in turn, have the potential to increase the value of shares in large Brazilian banks. One more factor that favors the entry of dollars in the Brazilian Stock Exchange.