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Brazilian Real — currency overview

The Brazilian Real has been Brazil’s national currency and money since 1994, replacing the Cruzeiro Real. The real (Reais) has been known in Brazil since 1690 when it became Brazil’s official currency.

From 1942 to 1994, in a span of 50 years, the country underwent currency denominations 7 times, each time removing 3 zeros from banknotes. Here is the list of the currencies:

  • Brazilian Milreis;
  • Cruzeiro;
  • New Cruzeiro;
  • Cruzado;
  • New Cruzado;
  • Cruzeiro;
  • Cruzeiro Real;
  • Brazilian Real.

What does the Dollar to Brazilian Real exchange rate depend on?

As mentioned earlier, the dollar to Brazilian Real exchange rate is influenced by fundamental data on the Brazilian economy and government actions. These indicators determine the long-term trends of all financial instruments traded in the country:

  • Key interest rate — When it decreases, it stimulates domestic production by providing affordable loans.
  • The country’s GDP indicator — Its growth strengthens the national currency and the profitability of financial instruments in the country, including securities on stock exchanges.
  • Level of foreign exchange reserves — Their growth indicates an increase in the country’s solvency. It allows for additional money issuance to control inflation, lending at low interest rates to boost production in the real economy, and payment for payment system services (Mastercard, Visa), among other things.

Unemployment rate, external debt level, and inflation rate — These indicators act as leading indicators of economic crisis phenomena. High unemployment, increasing external debt, or high inflation can lead to job cuts, rapid price increases, budget allocation for interest payments, reduction in social benefits, and eventually, devaluation of the national currency against the US dollar.

What are the reasons for the stagnation of the Brazilian economy and the fall in the USD to BRL exchange rate?

According to analysts, Brazil, as the largest economy in South America and the eighth largest in the world, currently finds itself in a precarious economic balance. There are several reasons for this:

  • The services sector is the largest component of GDP, accounting for 67.0%.
  • The industrial sector follows, accounting for 27.5% of GDP.
  • Agriculture contributes 5.5% to GDP.

The country has maintained economic discipline since 2007, which helped withstand the 2008 financial crisis. In 2007, Brazil experienced economic growth of 5.4%, inflation decreased to 3.6%, and the current account surplus rose to 3.6 trillion. As a result, Brazilians began spending more domestically. Additionally, the local real estate market doubled between 2003 and 2008, aided by the establishment of a local mortgage market.

However, starting in 2013, the country once again began spending excessively, and the main indicator of Brazil’s economic condition was the fiscal deficit—the amount of money spent in excess of the country’s income. Furthermore, oil prices fell in 2015 due to the strengthening of the US dollar. Since oil is Brazil’s primary export commodity, this led to a recession in 2015 and 2016, causing the country’s economy to contract by nearly 7%.

Brazil’s bloated and overly centralized federal government has hindered economic freedom for decades, and state corruption has resulted in political chaos. The past three presidents—Luiz Inácio “Lula” da Silva, Dilma Rousseff, and Michel Temer—have all been convicted of corruption.

Bureaucratic barriers are widespread, making it expensive and time-consuming to establish or expand a business.

Since the economic downturn, the new government has focused all efforts on reducing the budget deficit. The main objectives of the government in the near future are as follows:

  1. Pension reform: Brazilians retire too early (some as early as 50) and receive excessive benefits, particularly among civil servants. Brazil’s spending on social security benefits and pensions, which amounts to 14% of GDP, is disproportionate.
  2. Reduction in the number of civil servants: In reality, employment in the federal government has increased by 28% over the past 20 years.
  3. Tax reform is likely to commence in 2020: Brazil’s tax burden exceeds 33% of GDP, significantly higher than global standards. The tax system is complex and contributes to social inequality.

The Brazilian Central Bank’s refinancing rate for commercial banks is 4.5%, which is sufficient to facilitate lending to small and medium-sized businesses.

US dollar to Brazilian Real: Real is leveraging its advantages

Increased investment in the Brazilian economy and stabilization in the political situation could potentially lead to a future rise in the exchange rate of the US dollar against the Brazilian Real.

Despite the controversial circumstances, the real ended 2022 as one of the best-performing emerging market currencies. This was due to a series of interest rate hikes by the central bank and optimistic growth prospects. These factors could form the foundation for strengthening the Brazilian currency in the future.

The US dollar to Brazilian Real exchange rate began 2023 with a weakening of the Brazilian currency. Large players in the market engaged in selling, pushing the price further down and preventing it from consolidating above the 5.43 level. As a result, the exchange rate sank to the lower boundary of the corridor that formed in the previous summer.

Foreign investment inflows into Brazil in 2023 are expected to range between $75 billion and $80 billion, with projections for increasing amounts in subsequent years. This scenario does not have a particular alternative since Russia is under sanctions and in confrontation with the West, while Argentina and Turkey face high inflation rates and challenging economic situations. Increased investment in Brazil will contribute to the long-term appreciation of the Brazilian Real against the US dollar.

Investors and traders should bear in mind that Brazil’s key interest rate currently stands at a record high of 13.75% per year. Any changes in the monetary policy of the Central Bank of Brazil could potentially lead to a devaluation of the Real against the US dollar. Therefore, it is possible that the exchange rate between the US dollar and the Brazilian Real will trade within a similar range, around 5 to 5.5 Brazilian reals per dollar, for some time.

Additionally, our website provides information on the current USD to CNY exchange rate and other currency pairs.

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