by José de Castro
SAO PAULO (Reuters) – The dollar closed at its lowest level in eight weeks on Wednesday, below 5.10 reais, on a day of widespread weakening of the currency after unexpectedly weak U.S. inflation data contained expectations of stronger hikes in the US. interest there.
But the currency left session lows, as financial assets abroad also began to reflect some investor hesitation about the US central bank’s next steps.
The spot dollar fell 0.87% to 5.0853 reais, after hitting 5.035 reais, down 1.85%.
Outside, the dollar index dropped 1%, a respectable drop, but already below the 1.62% recorded earlier, the most expressive in the intraday since March 2020.
The sharp correction in the dollar worldwide came after US consumer inflation stagnated in July, against a 0.2% rise forecast in a Reuters consultation. The weaker numbers triggered a remarkable rally in equity markets, where the US Nasdaq index jumped 2.9%. [.NPT]
With milder inflation, the Fed could find room to slow the rate of rate hikes. The prospect of higher rates in less time has triggered a rally in the dollar this year, as higher interest rates reinforce the attractiveness of US fixed income, stimulating the conversion of foreign currencies to the dollar.
As investors cut bets on aggressive monetary tightening, therefore, the currency’s appeal wanes, which could spur profit-taking after the currency has recently renewed two-decade high sequential highs abroad.
“But despite the good reaction of assets, the pricing on the curve (of Treasuries) is still very divided on what the Fed will do at the next meeting. The next signs about US monetary policy will be one of the main points to be observed for the real”, said economist Luca Mercadante, from manager Rio Bravo.
Rio Bravo outlined a more conservative scenario in which it sees a new high of 75 basis points by the North American BC in September. With this morning’s weaker inflation data, the market is now split between an increase of that magnitude and a rise of 50 basis points.
The manager’s estimate is that the dollar will end this year at 5.50 reais, also influenced by the prospects for economic-fiscal policy in the post-election period.
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