Brazilian Real Weakens on US Tariffs

The Brazilian real weakened slightly to 5.09 per USD in mid-July from 5.07 earlier in the month after the US announced a new 25% tariff on Brazilian imports, effective July 22th. The measure is expected to reduce dollar inflows into Brazil by weighing on exports to the US, potentially weakening the country's trade surplus and slowing the recent appreciation of the real. A decline in export revenues could put upward pressure on the exchange rate in the coming months, particularly if markets revise down Brazil's trade balance outlook or reassess the country's risk profile. Meanwhile, lingering geopolitical risks in the Middle East and expectations that the Federal Reserve could keep interest rates higher for longer continued to limit gains in the Brazilian currency.

The Brazilian real strengthened to 5.11 per USD from 5.17 in early July, it's highest level in over three weeks, tracking other emerging market currencies as the US dollar weakened. Risk appetite improved after signs that diplomatic talks between the US and Iran are continuing despite recent tensions, easing geopolitical concerns and reducing demand for safe-haven assets. Domestically, the real also found support after Brazil's annual inflation slowed to 4.64% in June, below market expectations. Still, lingering risks of renewed Middle East disruptions and the prospect of further Federal Reserve tightening continued to limit gains.

The Brazilian real rose to 5.17 per USD from the three-month low of 5.22 on July 2nd as weak labor data from the US threatened to stretch the rate differential between the Fed and the BCB. The interest rate differential remains supportive for the real, with Brazil's benchmark Selic rate at 14.25% compared with the US policy range of 3.50%-3.75%. The wide yield gap continued to attract foreign inflows and support the Brazilian currency. Domestic gross public debt rose above forecasts in May, while primary deficit was wider than expected. The deterioration in fiscal accounts reinforced expectations of higher-for-longer borrowing costs and persistent upward pressure on interest rates. In addition, Brazil’s annual inflation rose past 4.8% in the first half of June, above the central bank's upper target band of 4.5%