Crisis, panic or just speculation? Understanding the instability of the dollar in Brazil

The US currency rose 17% this year in the country, but has fallen 3.5% in three days

Translated by: Ana Paula Rocha

Brasil de Fato | Curitiba (Paraná state) |
The economies of the US and Brazil influence the dollar against the real - Lee Jae-Won/Reuters

Brazil went through a currency swing last week. The dollar, rising since the beginning of the year, jumped from BRL 5.60 to BRL 5.70 from Monday to Tuesday (2). By Friday (5), it had fallen to BRL 5.50.

The fluctuation raised concerns about the national economy since the rise in the dollar could increase inflation in Brazil and have other side effects. But what justifies this oscillation, considering that the Brazilian economy has been performing above expectations since the beginning of President Luiz Inácio Lula da Silva's (Workers’ Party) third presidential term?

Economist André Roncaglia, a professor at the Federal University of São Paulo (Unifesp, in Portuguese), explained that the movements basically have three explanations: one is external, linked to the United States economy; another is internal, related to a supposed Brazilian crisis; and a third explanation has to do with the dynamics of financial market speculation.

The US factor

Roncaglia explained that the US economy is currently operating at a high basic interest rate by its standards. It has been as high as 5.5% a year since July last year – in 2022, it was as low as 0.5%. With high interest rates, more investors put money in US Treasury bonds than in other investments around the world. That reduces the supply of dollars outside the US and pressures the currency’s exchange rate.

"There is a greater flow of capital into US government bonds. As a result, the dollar gets stronger compared to other currencies. The real is subject to this," said Weslley Cantelmo, an economist and president of the Economias e Planejamento Institute.

This year, out of a basket of 118 currencies, 84 have lost value against the dollar. Brazil’s real has also fallen. It is even among the currencies that have depreciated the most.

National issue

This above-average fall has internal explanations, according to economists. It has to do with a lack of confidence by economic agents about the Brazilian government's ability to fulfill its fiscal commitments and keep spending under control.

Last year, the government promised to spend less than it raised in 2025. In April, this target was postponed to 2026 amid Lula's statements about social spending and investment having to be preserved. For those who advocate reduced spending at any cost, this has created a crisis, even with indicators showing a healthy national economy.

"They [the market] say that Brazil is on the brink of the precipice, heavily indebted, at risk of going bankrupt, and that the public accounts are insolvent," complained economist Juliane Furno, a professor at the State University of Rio de Janeiro (UERJ, in Portuguese), on the podcast Três por Quatro, produced by Brasil de Fato. "Nothing, absolutely nothing, points to a lack of control over the main macroeconomic variables."

The most up-to-date forecasts for the Brazilian economy point to growth of 2.3% in Gross Domestic Product (GDP) in 2024 – at the beginning of the year, the forecast was 1.5%. In the first half of the year, inflation has fallen compared to the first six months of 2023, from 3.16% to 2.52%. The 7.1% unemployment rate recorded in the quarter ending in May is the lowest of the last decade.


This unfounded fear gave rise to the possibility of speculating to make money. This is the third explanation for the dollar's swing in Brazil. The real is a currency integrated into the financial market. There are investors "betting" on its rise or fall so that they can profit. Some have seen the country's supposed fiscal crisis as a reason to bet on its fall, which tends to impact its real price.

"All of this has a component of an attempt to manipulate the market," said Cantelmo. "Roberto Campos Neto [president of the Central Bank] is even working to make this happen."

Cantelmo recalled that Campos Neto said publicly that the Central Bank would not intervene in the dollar price, something that would be a common strategy considering the country’s search for stability and the high foreign exchange reserves Brazil holds.

The Central Bank manages reserves of US$ 355 billion. It can sell part of this when the dollar rises in order to increase the supply of the currency, lower its price and still take advantage of the opportunity for financial gain.

"Campos Neto should have kept quiet. He shouldn't have said he wasn't going to intervene," said Pedro Faria, also an economist. "And there are market players taking advantage of his words and the global situation of the rising dollar to make a profit."

Putting out the fire

While Campo Neto opened the way for more speculation on the dollar, Lula decided to calm the market on Wednesday (3). The Brazilian president called a meeting of the government's economic team amid the rising dollar and reinforced his commitment to controlling public spending.

"We don't throw money away. Fiscal responsibility is not a word; it has been a commitment of this government since 2003," said Lula, referring to the first year of his first presidential term.

On the same day, the government announced it was blocking BRL 25 billion (approximately US$ 4,575 billion) in spending to comply with the rules of the new fiscal framework, which reduced the pressure on the Brazilian real and brought down the dollar.

Edited by: Martina Medina