Brazilian Real Strengthens to Over 1-Year High

The Brazilian real traded above 5.15 per USD in June, weakening after the latest interest rate decisions by Brazil’s central bank and the US Federal Reserve. The Monetary Policy Committee cut the Selic rate by 0.25 percentage points to 14.25% per year, while leaving its next steps open and dependent on incoming data. In the US, the Federal Open Market Committee kept its benchmark rate unchanged at 3.50%-3.75%, but signaled a hawkish outlook. The move in the currency reflected a worsening outlook for the interest rate differential between Brazil and the US, a key factor for foreign investors. Lower expected rates in Brazil and higher-for-longer rates in the US reduce the appeal of real-denominated assets, supporting the dollar against the real. Meanwhile, oil prices fell after the signing of a US-Iran agreement aimed at ending the conflict and reopening the Strait of Hormuz, easing energy-driven inflation expectations.

The Brazilian real traded near 5.19 per USD in June, remaining close to its weakest level in two months as broad dollar strength prevailed amid heightened tensions in the Middle East. Concerns intensified after a US helicopter was shot down near the Strait of Hormuz, prompting retaliatory US strikes and boosting demand for safe-haven assets. Meanwhile, elevated US inflation and a tight labor market reinforced expectations of a hawkish Federal Reserve. In Brazil, investors also monitored a poll showing President Lula widening his lead over Senator Flávio Bolsonaro. Economic data remained resilient, with GDP expanding 1.1% in the first quarter, above expectations, while annual inflation accelerated to 4.39% in April. Market pricing now suggests a pause in the central bank's easing cycle at next week's meeting, with investors increasingly betting that the next move in interest rates will be upward.

The Brazilian real weakened to 5.06 per USD in early June as proposed US tariffs on Brazilian products and uncertainty surrounding US-Iran negotiations weighed on investor sentiment. US authorities said the proposed measures stem from findings that Brazil and other countries have not taken sufficient steps to prevent imports of goods produced with forced labor. The prospect of higher trade barriers increased caution toward Brazilian assets. Meanwhile, rising tensions in the Middle East supported oil prices and fueled broader risk aversion. Hostilities intensified after Iranian attacks on Kuwait, while US strikes near the Strait of Hormuz and limited diplomatic progress clouded prospects for a resolution. The combination of geopolitical uncertainty and trade concerns boosted demand for the US dollar, pressuring emerging-market currencies, including the real.