Dollar closes above R$5 as global currency soars on fears of stagflation By Reuters

© Reuters. Dollar bills around graph 11/7/2016 REUTERS/Dado Ruvic/Illustration/File Photo

by José de Castro

SAO PAULO (Reuters) – The price soared on Thursday and returned to close above 5 reais, taking a ride on the global rally of the US currency on fears that interest rates in the United States will have to rise more than expected.

The price more than gave back all of the previous fall, when investors showed relief at the signal from the head of the US central bank that sharper rate hikes were not expected. But the respite didn’t last 24 hours, and this Thursday the fear of a monetary shock in the US again prevailed, a movement with the potential to shake markets across the planet and drain liquidity from emerging countries like Brazil.

Thus, the spot dollar closed up 2.34%, at 5.0166 reais on sale. The currency varied between a rise of 0.58% (to 4.9305 reais) and a gain of 3.21% (to 5.0592 reais).

On Wednesday, the currency had fallen 1.26%, to 4,902 reais.

Abroad, emerging currencies suffered the biggest drop since mid-March. Already against a basket of rivals from rich countries jumped 1%, to the highest value in two decades.

In another symptom of the general bad mood, stock markets plummeted. The index tumbled almost 3%, while on Wall Street the index – more vulnerable to monetary tightening in the US due to its greater weight of growth stocks – plunged 5%.

What is beginning to appear on the list of investors’ concerns is the risk of recession, which would be the result of the rapid tightening of global monetary policies, which on the other hand might not be able to stop inflation. The result would be stagflation, a phenomenon that traditionally benefits the dollar.

“High inflation prevents central banks from acting, as in periods of the recent past, providing support to the economy and markets in the form of lower interest rates and added liquidity in the markets,” TAG Investimentos said in a monthly letter.

“This explains the pressure on the commodities market, as well as a deterioration in the environment for emerging assets throughout the month, in which Brazil ended up being severely affected”, he added. The manager cites “a very perverse cocktail” for countries like Brazil: high interest rates in the developed world, high inflation, lower growth (especially in China), lower demand for commodities and consequent fall in raw material prices.

After having appreciated throughout the first quarter, the real depreciated in April and continues to fall in the balance of the first sessions of May. The dollar rose 3.79% in April and advanced 1.48% in May, after falling 14.55% in the first three months of the year.

This “fat” accumulated by the exchange rate in early 2022 helps explain why the Brazilian currency is now one of the most targeted by the global liquidation, with investors taking profits on “winning” assets during the initial shock of the Ukraine war, that boosted commodity prices.

And the scenario could be worse for real if the “beta” (a measure of sensitivity) in relation to local commodity stocks were higher. Per a Goldman Sachs (NYSE:) list, the Brazilian currency’s “beta” is in the middle of the table, while the Colombian peso looks more vulnerable to a correction in local commodity stocks.

“We see more room for the real to depreciate and remain undervalued relative to its fair value in the coming months,” Rabobank professionals said in a monthly letter.

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