Dollar soars in Brazil on Fed’s stance and higher risk aversion

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     Porto Alegre, April 25, 2022 – The harsher speech by Fed Chair Jerome Powell, showing concern about inflation and indicating the need for a more hawkish (aggressive) stance by the US monetary authority. Powell said that the 0.50% hike in interest rates will be on the table at the Fomc meeting in May, which increased global risk aversion and favored the rise in the dollar against other currencies. Throughout the week, the IMF projections had already created a more pessimistic environment, which was reflected in a more cautious posture on the part of investors. So, the DXY index closed Friday (22) above 101 points.

     The troublesome global scenario has partly contaminated the domestic context. Fiscal mistrust also grows. The issue of readjusting the civil service salaries reopens the debate on a more populist bias on the part of the government in an election year, as well as on the short- and long-term effects on public accounts.

     Signs of heated inflation leave room for Brazil’s Central Bank to remain aggressive toward the Selic prime rate, which favors the real against the dollar. External interest in commodity-linked currencies is an additional factor that helps limit the dollar’s recovery against the real. Because of the war, Ukraine, Russia and Turkey lost their attractiveness amid investors, with financial flow partly directed to Brazil. These investors are watching both high interest rates and the bullish potential of commodities.

     The IMF has signaled a slowdown in the world economy, with the war in Ukraine hampering the recovery of post-pandemic global activity. The Russian economy must be severely impacted and decline by 8.5% this year and a further 2.3% in 2023, according to the IMF. As a side effect, there was also a 2.9% reduction in economic activity among emerging European countries this year. Global inflation must remain high, fueled especially by high commodity prices. With that, world employment and production must remain below the pre-pandemic level. The world growth is projected at 3.6% in 2022 and also in 2023. The numbers are 0.8 and 0.2% below last January’s report.

     The IMF expects the economy to grow by 3.3% in 2022 and 2.3% in 2023 in the United States. Despite lower unemployment, deficiencies in production chains along with a real decline in the workers’ purchasing power affect the performance of the US economy. In China, the performance is compromised by lockdowns and supply chain disruptions. The Chinese economy is expected to grow 4.4% in 2022 and 5.10% in 2023. For Brazil, the IMF projects growth of 0.8% in 2022 and 1.4% in 2023, well below the world average.

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