Brazilian Real Weakens on Hawkish Fed and Political Concerns

The Brazilian real weakened to 5.02 per USD in late May, broadly in line with other emerging-market currencies, amid a more hawkish stance from the US Federal Reserve. Rising geopolitical uncertainty in the Middle East also fueled risk aversion and supported the US dollar. Additional pressure came from comments by Federal Reserve Governor Christopher Waller, which reinforced expectations that US interest rates could remain elevated for longer. Domestically, the weakening political position of Senator Flávio Bolsonaro continued to weigh on the real, as markets had expected the opposition to remain competitive in this year’s presidential election.

The Brazilian real weakened to 5.07 per USD in mid-May, retreating sharply from the two-year high of 4.89 reached earlier in the month. The decline followed reports alleging ties between Senator Flávio Bolsonaro, a contender in Brazil’s October presidential election, and Daniel Vorcaro, owner of failed lender Banco Master, who was charged with fraud. Investors assessed that the allegations could weaken Bolsonaro’s candidacy, currently viewed as President Luiz Inácio Lula da Silva’s main challenger. Abroad, the US dollar strengthened alongside rising Treasury yields as markets increasingly priced in the possibility of additional Federal Reserve interest rate hikes later this year.

The Brazilian real appreciated sligthly to 4.98 per USD in mid-May, giving back part of its recent sharp losses after briefly weakning beyond the 5.00 level. The downward move followed reports alleging ties between Senator Flávio Bolsonaro, a contender in Brazil’s October presidential election, and Daniel Vorcaro, owner of failed lender Banco Master, who was charged with fraud. Investors assessed that the allegations could weaken Flávio Bolsonaro’s candidacy, currently seen as President Luiz Inácio Lula da Silva’s main challenger. Abroad, the US dollar strengthened alongside rising Treasury yields, as markets increasingly priced in the possibility of additional Federal Reserve rate hikes later this year.