This year, the dollar is on the rise. The price of the US currency jumped from BRL 4.85 at the beginning of January to BRL 5.75 on Monday (5), the highest it has been since March 2021.
The accumulated appreciation so far is 18%. According to economists, this is mainly linked to investors’ distrust of the direction of the world economy. Tensions in the Middle East have risen due to the assassination of Hamas leader Ismail Haniyeh. Job creation in the United States has been disappointing, and this has increased demand for security – which ultimately increases demand for the dollar.
In Brazil, the economy is on the right track, growing more than expected at the beginning of the year; unemployment is falling. However, the rise of the dollar may become a problem, which can probably begin with inflation and then impact the whole economic development underway.
That’s because the increase in the value of the US currency interferes with prices in Brazil. Economist Miguel de Oliveira, vice-president of Anefac (National Association of Finance Executives), explained that the US currency is decisive for the cost of everything imported into the country. It is even taken into account when deciding the price of food and other national products sold on the global market, such as fuel.
A month ago, Petrobras increased gas and diesel prices, taking into account the rise in oil prices, which are sold in dollars.
Economist and agronomist José Giacomo Baccarin added that some of the products Brazilians consume come from abroad – in other words, they become more expensive as the dollar rises. Even the price of food produced in Brazil also tends to rise since, interconnected to the global market, a Brazilian cattle farmer may decide to export the meat produced in the country if the international price is worth more to him.
“You export chicken for a higher price in reais [the plural form of the Brazilian currency], and this is passed on to the domestic market. You also import wheat at a higher price,” he said. “So currency devaluation affects the prices of both exportable and importable products.”
Inflation
The rise in the prices of some products tends to raise inflation. By the way, it was partially noticed between June and July.
Due to the rise in fuel prices by Petrobras, July’s inflation forecast stood at 0.3%. In the same month last year, it was -0.07% – in other words, a negative variation, indicating a general drop in prices.
In 12 months, inflation has accumulated a 4.45% variation. It is, therefore, very close to the goal for 2024 set for the rate: 3%, with a tolerance of 1.5, that is, 4.5%.
Baccarin said that generalized price increases can be a considerable economic problem. In the case of rising food prices, more than an economic problem, it is a social problem that tends to hurt the poorest people.
“When food becomes more expensive, the poorest consumers, who spend 30% to 40% of their income on food, are the ones most affected,” said the economist. “The poorest will sometimes give up animal protein, eat less meat, exchange products of nutritional quality for products of lower nutritional quality or even reduce the amount of food they consume.”
Interest
When inflation rises, the Brazilian Central Bank’s Monetary Policy Committee (Copom, in Portuguese) tends to increase the country’s basic interest rate, the so-called Selic.
At the end of last month, Copom decided to keep the Selic at 10.5% per year – considered high – already concerned about signs of rising inflation. In the minutes of this meeting, the committee warned that it may even raise the Selic in the coming months considering the “challenging foreign scenario”, which has an impact on the exchange rate.
“Capital flows also reflect a global phenomenon of risk aversion, which, depending on the fundamentals of each emerging economy, puts pressure on the exchange rate with varying intensity,” the committee described, explaining the increase in dollar exchange in Brazil.
More consequences
The problem is that the inflation rise in Brazil has an impact on many economic indicators because it works as a reference to the national economy.
When the Selic rate rises, loans and financing tend to become more expensive. This discourages purchases and investments, which curb inflation and directly affects economic growth.
When the rate falls, the interest charged to consumers and companies becomes lower. More people buy and invest and the economy grows, creating jobs and favoring wage increases. Prices, in turn, tend to rise due to higher demand.
The Selic is also a reference rate for the debt securities that the government issues to finance its activities. This means that, when it goes up or down, it also influences interest expenditure and even the total value of Brazilian debt.
In June, for example, the Brazilian public sector spent BRL 94.9 billion (over US$ 17,1 billion) on financial services for its debt alone. The expenditure was the highest ever recorded in a month since June 2022. It is also more than double the amount recorded in June last year, BRL 40.7 billion (US$ 7,3 billion).
Considering this data, President Luiz Inácio Lula da Silva’s government has been publicly calling for a reduction in the Selic rate. Against a backdrop of a rise in the dollar exchange rate, however, such reductions are becoming less and less likely.
Protection
Because of all these consequences for the economy, economists advocate coordinated action to curb major variations in the dollar exchange rate.
Mauricio Weiss, economist and professor at the Federal University of Rio Grande do Sul (UFRGS, in Portuguese), recommends that the Central Bank take action in the dollar-linked bond market. “In the short term, it could act more directly in the derivatives market through swaps.”
A swap is a financial derivative that simultaneously promotes the exchange of rates or the profitability of financial assets between economic agents. Through these operations, the Central Bank can “protect” the domestic market from exchange rate variations.
Weslley Cantelmo, economist and president of the Economies and Planning Institute (IEP, in Portuguese), also recommends that the Central Bank sell dollar reserves to increase the availability of the currency on the market and bring down its price.
At the end of 2023, Brazil had US$ 355 billion in international reserves.
Both the use of swaps and the sale of reserves depend on purposeful action by Brazil’s Central Bank. Cantelmo, however, complains that the agency, chaired by Roberto Campos Neto, appointed by former president Jair Bolsonaro (Liberal Party), has been passive in this regard. Campos Neto’s term as president of the Central Bank ends on December 31 this year. “The Central Bank has used the exchange rate issue to justify the high interest rate,” he said.
Edited by: Martina Medina
