Recently, we have witnessed a notable appreciation of the dollar in relation to several global currencies, including the real. This trend raises questions about the driving factors behind this movement and its impact on financial markets and the world economy.
From the economic development of the United States to the fiscal challenges faced by Brazil and geopolitical events in the Middle East, each of these topics has repercussions on the dynamics of the foreign exchange market. Therefore, understanding these elements offers valuable insight into the future of foreign exchange and strategies for dealing with it.
US growth
The exchange rate is a complex dynamic, but if there is something that tends to increase the value of a country’s currency, it is the positive perception that the world has about it. In this way, an aversion to international risk or greater confidence in the United States economy usually strengthens the dollar, considered globally a safe haven.
In recent weeks, both North American numbers have exceeded projections made so far. According to the Federal Reserve (Fed), these data point to the need to maintain high rates for an extended period.
Initially, it was expected that the country’s Central Bank would be reducing interest rates at the beginning of the year. Currently, the rate is between 5.25% and 5.5%, the highest level since the beginning of the century. However, surprising economic data in the United States has changed this expectation; currently, the rate is between 5.25% and 5.5%, the highest level since the beginning of the century, and cuts are only expected to occur in September.
Third-party advertising. It is not an offer or recommendation from Investing.com. Read our guidelines here or
remove ads
.
In fact, this vision has found support among directors of the financial institution, who signal the importance of maintaining restrictive monetary policy for an extended period. In practice, this is reflected in future interest rates in the United States and, consequently, in the increase in yields on US Treasury bonds, a context that tends to boost the dollar globally.
Fiscal challenge in Brazil
With recent indicators of economic activity in the United States continuing to exceed expectations, it is possible that there will be additional pressure on Brazilian monetary and exchange rate policy. The North American country’s slowness in starting the cycle of interest cuts, in addition to the reduction carried out by the Central Bank of Brazil (Bacen), reduces the interest differential between the two economies. Thus, the attractiveness of the so-called “carry trade” falls, which tends to weaken the local currency.
The deterioration of fiscal perception in Brazilian territory also accentuated the advance of . In the review of fiscal targets in the Budget Guidelines Law (LDO), estimates of 0.5% in 2025 were replaced by the elimination of the deficit next year. The projection of 1% for 2026 was reduced to 0.25%, reaching 0.5% in 2027 and returning to 1% in 2028.
Recently, the president of Bacen, Roberto Campos Neto, also highlighted that the amount will need to be raised due to the decrease in fiscal confidence. Given the risks at stake, a further reduction in interest rates could result in an even more pronounced depreciation of the real and increase inflationary pressures.
Third-party advertising. It is not an offer or recommendation from Investing.com. Read our guidelines here or
remove ads
.
On the other hand, the Minister of Finance, Fernando Haddad, highlighted that most of the exchange rate depreciation arises from the international context, which is not unfounded. Increased global risk and a more cautious approach to monetary policy by the Fed have a significant effect.
However, we cannot ignore that internal concerns have contributed to the recent deterioration.
Escalation of tensions in the Middle East
Finally, Iran’s direct involvement in conflicts with Israel has reignited investor concerns about a possible resurgence of inflation. Although uncertainties are concentrated in the region, the impacts of these events are global, both in diplomatic and economic terms. The main risk for the markets lies in the possibility of an escalation of the conflict affecting the price of , as any interruption in regional logistics is likely to interfere with the supply of this crucial commodity.
In recent weeks, product prices have risen for the first time since October, driven by concerns related to the Iranian attack on Israeli territory. Despite the low lethality of the attack, apprehension regarding a potential more incisive retaliation is latent.
Not surprisingly, experts warn that an open conflict between Iran and Israel could raise oil prices to around US$120, exacerbating global inflation. This scenario, in turn, would reduce the chances of interest rate cuts in the United States.
Precautions for the future of the dollar
Amid the complexities of the global economic scenario, it is clear that the recent appreciation of the dollar has profound and multifaceted implications. By understanding the agents causing this rise and their interconnections, we can glimpse the possible developments in the foreign exchange market and the world economy.
Third-party advertising. It is not an offer or recommendation from Investing.com. Read our guidelines here or
remove ads
.
Given this, it is essential to adopt a cautious and adaptive approach to navigating the challenges and opportunities that present themselves. As we move into 2024, it remains crucial to closely monitor these factors and adjust strategies as necessary to mitigate risks and capitalize on existing projections.
Tags: Unraveling dollars rise factors currencys appreciation
--
