We know that the exchange rate of the dollar is directly related to politics, given that Brazil practices a floating exchange rate regime. Consequently, various events in domestic politics quickly reflect in the rise or fall of the dollar, which strengthens or weakens our currency according to its supply and demand.

This year is a presidential election year, and clearly, an event of this magnitude further impacts our economy, creating a pre-election speculation scenario of uncertainty for the market: which candidate will be better for the country’s functioning? Does Brazil need more liberal or protectionist measures? A candidate advocating economic openness is leading in the polls; what now? These and other questions are considered by the international market to decide whether to invest in the country, thus avoiding significant risks.

With all this “buzz” already happening, financial market experts predict that the dollar could reach R$6 this year due to the climate of uncertainty. However, after political definitions are made, it may stabilize around R$5.50.

Last year, the dollar even closed some days below R$5, around R$4.95, but fluctuated throughout the months between R$5.20 and R$5.70, peaking at R$5.80 by the end of March.

Inflation and Selic

In addition to the political scenario, there are other factors influencing the fluctuations in the dollar exchange rate, just as the dollar exchange rate influences various indicators of our economy. Inflation, for instance, which is the widespread increase in prices, is affected, among other factors, by the dollar exchange rate. When the real is devalued, meaning the dollar is “expensive,” we pay more for imports of various products, causing domestic prices to rise. The accumulated inflation over the last twelve months is around 10%; that is, what you could buy for R$100 in January 2021 now costs about R$110. From the perspective of exports, Brazil benefited from this increase in commodity shipments, selling smaller quantities but at significantly higher prices than in 2020.

As for the Selic rate, which is the basic interest rate of our economy, it currently stands at 9.25%, while in 2020 it fell to 2%, the lowest level in history. These fluctuations are attempts to balance the country’s economy. Essentially, the Central Bank raises interest rates when it needs to control inflation, cooling the economy and causing prices to fall. Theoretically, a higher Selic rate leads to a “decrease” in the dollar value, as investment returns in the country become more attractive, resulting in an influx of resources. This increase in dollars in the domestic market causes its price to fall due to the law of supply and demand.