Brazilian Real Poised for Modest Recovery After Tumultuous 2024, But US Dominance Remains a Hurdle
The Brazilian real, battered by a 22% decline in 2024, is projected to stage a slight recovery, trading around 6 per US dollar by the end of 2025, according to a Reuters poll of foreign exchange analysts. The currency’s woes stemmed largely from investor skepticism surrounding President Lula da Silva’s fiscal package aimed at addressing burgeoning debt concerns. The real’s freefall was only halted by the Brazilian central bank’s aggressive intervention in the final weeks of 2024, selling nearly 10% of its reserves to bolster the currency. While the real has stabilized following its plunge to record lows, its prospects for significant gains this year remain limited, constrained by the continued dominance of the US dollar in global currency markets.
The median forecast from 25 analysts surveyed between January 3rd and 8th points to the real trading at 5.94 per dollar in one year, a modest 2.7% appreciation from its current value of 6.10. Market analysts attribute the pressure on the real to the perceived inadequacy of the government’s spending cuts in Congress. Despite the central bank’s intervention, the underlying negative sentiment surrounding the Brazilian currency persists, presenting a significant challenge for its recovery.
The Brazilian central bank’s intervention in December involved selling $22 billion in spot foreign exchange markets and an additional $11 billion through repurchase agreements. This aggressive action effectively stemmed the real’s slide. However, the central bank has refrained from further intervention in the early days of 2025, adopting a wait-and-see approach. Analysts at Banco Inter suggest that the combination of higher US yields and perceived fiscal risks in Brazil will likely keep the real hovering around the 6 per dollar mark.
The recent rise in US Treasury yields, fueled by data indicating a resilient US economy, reinforces market expectations that the Federal Reserve may have only one more quarter-point interest rate cut remaining. This further strengthens the US dollar, adding to the headwinds faced by emerging market currencies like the Brazilian real. Furthermore, currency strategists are closely monitoring the upcoming inauguration of US President-elect Donald Trump, wary of potential protectionist policies that could significantly impact emerging markets.
The Mexican peso, another Latin American currency facing challenges, also suffered a significant decline of nearly 19% in 2024. The peso’s weakness was driven by concerns over potential US tariffs as well as domestic controversies surrounding judicial reforms. Looking ahead, the peso is forecast to trade at 20.90 per dollar in 12 months, a 2.8% depreciation from its current value.
The overall outlook for emerging market currencies remains clouded by the ongoing strength of the US dollar and uncertainty surrounding global trade policies. While the Brazilian real is expected to recover modestly, its path to significant appreciation is fraught with challenges stemming from domestic fiscal concerns and external pressures. The Mexican peso, facing its own set of headwinds, is projected to weaken further in the coming year. Latin American currencies are likely to remain volatile in the near term, influenced by both domestic and international developments.
