Brazil’s central bank launched an aggressive defense of its currency on Tuesday, conducting two dollar auctions totaling $3.27 billion in an effort to stem a sharp decline in the real.
The interventions, the fourth in three days, briefly halted the selloff that has driven the real down more than 20% this year, the steepest loss among major currencies.
The real’s slide, tied to mounting concerns over Brazil’s fiscal policies, has rippled across financial markets.
Government dollar bonds have suffered significant losses, leading declines among emerging markets.
Brad Bechtel, global head of FX at Jefferies, described the situation as a “train wreck” and stressed that meaningful improvement depends on fiscal policy changes.
A Fiscal Tightrope
Investors remain wary of the government’s ability to address its fiscal challenges.
Last month, President Luiz Inácio Lula da Silva announced income tax breaks alongside a plan to cut 70 billion reais ($11.5 billion) in spending.
However, traders viewed the measures as insufficient, highlighting concerns that the administration is prioritizing economic growth over fiscal discipline.
Meanwhile, the central bank, led by Roberto Campos Neto, has taken aggressive steps to combat inflation, raising interest rates to 12.25% this month with plans for further increases.
Policymakers warned that inflationary pressures are worsening, partly driven by the weaker real, which risks pushing up import costs.
Temporary Relief, Persistent Worries
The real gained 0.4% against the US dollar in Sao Paulo after lawmakers scheduled two spending-cut bills for debate, reversing earlier losses of up to 1.2%.
The central bank’s two auctions, involving $1.27 billion in the morning and $2 billion later, helped stabilize the currency for now.
Still, analysts are skeptical about the lasting impact of such measures.
Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA, described the interventions as “fig leaves” and argued that only a stronger fiscal commitment can restore confidence in Brazilian markets.
Historically, currency interventions have had limited success without broader reforms.
The unfolding crisis highlights the balancing act required to stabilize the currency while addressing fiscal concerns.
For Brazil’s policymakers and business community alike, the next steps could prove decisive in shaping the nation’s economic trajectory.
Whether these actions bring lasting stability or only a brief reprieve remains an open question.
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