Why is the dollar rising?

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That the dollar cash is in an upward trend, you know: since the beginning of 2020, the American currency has accumulated gains of more than 8% – an escalation that has led the currency to new records in nominal terms.

The theme has generated heated debates and aroused a curiosity that goes far beyond the financial market. A survey prepared by Google shows that the exchange rate appears among the most sought after subjects by Brazilians this week.

So, let’s answer the five biggest questions regarding the behavior of the American currency. I don’t know if you will find the answer on Google, but it is here in Your Money. Let’s start with everyone’s big question:

1 – Why is the dollar rising?

This is not a simple question, since the upward trend of the American currency is the result of a number of reasons that work together, and not just a single point of stress. Both abroad and in Brazil, there are several factors that put pressure on the exchange rate.

First, there is the most cautious environment seen out there. It is good to remember that, since the beginning of the year, two major events have raised investors’ perception of risk: friction between the United States and Iran in the Middle East and the coronavirus outbreak.

As much as the tension between Americans and Iranians did not develop into a military conflict itself, the market experienced turbulent days at the beginning of the year, fearing a warlike escalation in the Middle East – and this concern translated into a first wave of appreciation of the dollar against the currencies of emerging countries, like the real.

And, when investors’ spirits started to calm down, the second wave of caution came: the emergence of a mysterious disease in China and its dissemination to other countries.

The coronavirus affects the dollar because it represents a risk to the growth of the world economy. China, the epicenter of the problem, is a major consumer of commodities and an important player in international trade.

Thus, a slowdown in Chinese activity would bring turbulence to the globe, in a kind of domino effect. And as there is still no solid prospect for containing the outbreak, the market is looking for defense mechanisms – one of which is to buy dollars, a strong and stable currency.

In addition to external factors, there are also domestic issues. Here, there is the “Selic effect”: with the basic interest rate being cut to 4.25% per year, Brazil is less attractive to foreign investors looking for easy returns.

This is a structural point in the Brazilian economy, and is related to the risk associated with the country. In summary: the investor compares the interest rate of Brazil and the United States and, the bigger the difference, the more profitable the investment of resources here will be.

However, with the successive cuts in the Selic rate, this differential in rates fell a lot – to the point that, when looking at Brazil’s current risk rating, investors who seek only this type of return no longer find much advantage.

Thus, the flow of ‘speculative’ money towards Brazil, which was once abundant, has been dwindling – and with fewer dollars entering the country, the price of the American currency goes up.

Finally, there is market distrust of the resumption of growth in the Brazilian economy and the malaise generated by the recent statements by Minister Paulo Guedes, acting together to bring even more stress to the dollar.

2. How much is the dollar today?

Rising dollar

At around 3:30 pm this Thursday (13th), the dollar in cash was traded at R $ 4.3470, down slightly by 0.10%. Throughout the session, the American currency fluctuated between R $ 4.3095 (-0.95%) and R $ 4.3830 (+ 0.74%) – a new nominal record in intraday terms. Follow the movement of the trading session in real time.

It is important to emphasize the use of the term ‘nominal’ when talking about successive maxims of the dollar. These records refer to the face value of the exchange rate, without considering inflation.

The nominal maximum closing of the dollar in cash was registered last Wednesday (12), at R $ 4.3510.

3. When will the dollar go down?

Dollar balloon

You see, this is a very complicated question. The exchange rate, after all, is the market that is exposed to the greatest number of variables, both domestic and international – which makes any prediction for the dollar’s behavior difficult.

It is almost impossible to set a date when the American currency will fall, but it is perfectly feasible to mention some factors that can help to take the pressure off the exchange rate.

If the Brazilian economy starts to show firmer signs of warming up, the trend is for relief in the spot dollar rate. After all, GDP growth data is the country’s calling card for foreign investors – and a strong economy is a key factor in attracting foreign resources.

Still in Brazil, advancing the economic reform agenda in Congress is also important for the resumption of market confidence. The approval of the new Social Security rules was well received by investors, who now await the progress of tax and administrative reforms.

Outside, coronavirus developments will be closely monitored by the market. Should the outbreak of the disease deepen, the dollar tends to advance further; if the opposite occurs and the global economy is not much affected, the tendency is for a decline in risk aversion – and, thus, a greater demand for currencies from emerging countries.

Having said all that, a good tip is: always have dollars in your investment portfolio. In the worst case, the US currency will act as a protection for your portfolio, valuing when everything else is falling; at best, you will have a safe asset in hand.

4. Why did the dollar rise so much?

Rising dollar

The name of the game is ‘risk aversion’. Financial markets hate situations where there is no predictability as to what will happen in the future – and, so far, 2020 is full of such circumstances.

In the exchange rate, there is a classic strategy to deal with periods of stress: when in doubt, it is better to sell the riskiest currencies, such as those from emerging countries – such as the Real, the Mexican Peso, the Russian Ruble, the Chilean Peso or the South Rand African, among others – and seek safer options.

Among these security balls are the dollar, the euro and the yen. Another good option is gold – since the beginning of the year, the commodity has already risen almost 4%.

This Thursday, the Central Bank (BC) acted on the exchange rate to try to contain the surge in the dollar, which hit R $ 4.38 earlier. The monetary authority called an extraordinary exchange swap auction, in the amount of up to US $ 1 billion – which, in practice, means the injection of new money in the market.

The BC initiative brought immediate relief, driving the dollar from its maximums. However, such actions are sporadic and occur only when the Central Bank identifies some type of dysfunction in the market.

After all, the exchange rate regime in Brazil is fluctuating – so, in theory, the BC does not try to artificially control currency fluctuations or defend a specific dollar quote.

5. What makes the dollar go up?

Dollar

There are domestic and external variables capable of influencing the dollar rate. What these factors have in common is the ability to decrease predictability in relation to the future, increasing investors’ perception of risk.

Thus, the coronavirus affects the dollar because the market does not know if the outbreak of the disease will affect the global economy, if China will consume less commodities or if the flow of people will suffer some restriction; the pension reform affected the exchange rate because, if it were not approved, Brazil would enter a very difficult fiscal situation.

As for the Selic, investors are now in a kind of bifurcation. On the one hand, the BC signaled at the last Copom meeting that it will no longer cut interest rates; on the other, weak data from the Brazilian economy suggest that there is still a need for extra stimuli, which can be done via a further reduction in rates.

Should the Selic fall again, the interest differential in relation to the USA will further decrease, driving some investors away; if the Selic remains stable, the difference will remain at current levels. So here is one more factor of uncertainty.

In short, this is it: whoever follows the foreign exchange market must be aware of a series of variables, in order to map the most diverse risk factors. A complex task, but one that, at the end of the day, helps to understand the behavior of the dollar a little.



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