Depending on the Kindness of Strangers
Recent behavior of the U.S. dollar and interest rates indicates that external factors' contribution to the appreciation of Brazil's exchange rate are likely to be lower than expected. Along with data showing robust activity and labor market conditions, increased odds of Donald Trump winning the presidential elections have strengthened the U.S. dollar.
Trump's proposals suggest a more expansionary fiscal policy than that indicated by Kamala Harris, while tariffs on imported goods should push up the price level. Consequently, the interest rate differential between Brazil and the United States, which increases with the loosening of the Federal Reserve's monetary policy, would be smaller in case Trump assumes the presidency (relative to a a scenario in which Harris wins), as would the U.S.-European rate differential, leading to a globally stronger dollar. In this case, the Brazilian real, already impacted by high domestic risks, would face a stronger dollar than it would under a Democratic victory in the U.S.
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