The real depreciated to a four-year low (R$2.1815 per U.S. dollar) on Tuesday as protests against corruption and bad governance continued to swell in the streets of 12 Brazilian cities. The real has declined 9 percent since March forcing the Central Bank to take action to reduce inflationary pressure.
While the Brazilian police were preventing demonstrators from rushing government buildings, the country was bracing itself for the “adverse winds” caused by a stronger U.S. dollar, according to Central Bank president Alexandre Tombini. The bank intervened in the currency market for the eighth time this month, selling $4.6 billion in foreign exchange swap contracts to slow the currency’s decline. The Brazilian Treasury also worked to reduce inflation by holding its second unscheduled auction in five years, buying back approximately 2 million fixed-rate government bonds.
The real’s continued drop coincided with the second week of demonstrations, which originally began as a protest against increased bus fares. In the largest protest in 20 years, approximately 200,000 demonstrators marched in 12 Brazilian cities—including Brasilia, São Paulo and Rio de Janeiro—to protest, among other things, high taxes as well as increased government spending on the World Cup and Olympic games instead of health care and education.
While Brazilian President Dilma Rousseff voiced her support for peaceful protests, the demonstrations have attracted negative international attention leading up to the 2014 World Cup.
The value of the Brazilian real dropped to less than two reais per U.S. dollar on Monday for the first time in three years. Responding to investor concerns over Greece’s possible exit from the Eurozone and slowing global economic growth, the euro dropped to its lowest level since mid-January, dragging the real and other emerging-market currencies along with it. The real has seen a 13 percent depreciation since late February, and at 1.99 reais to the dollar, surpassed its previous low point from July 2009.
Traders expect Brazil’s central bank to begin selling dollars in order to support importers and temper a potential spike in inflation usually associated with a drop in currency value. “Over the next three months, monthly inflation will be slower than in April,” said Brazilian Central Bank President Alexandre Tombini in Rio de Jainero last week. Tombini added that the real is weakening as part of a global trend that favors the dollar over most currencies, particularly those that were boosted by the boom in commodity prices.
In an effort to quell panic among investors, Finance Minister Guido Mantega explained on Monday that a depreciating real and a strong dollar will help “Brazilian exporters compete overseas and it also helps Brazilian manufacturers compete against imports in our own market." Though the Brazilian government has taken steps to avoid a steep currency appreciation in the past, Mantega said that it will not intervene this time.
The Brazilian economy officially entered into recession today after IBGE, the national statistics agency, reported that the economy contracted at a rate of 0.8 percent in the first quarter of 2009. Economists define a recession as a contraction lasting two or more consecutive quarters. Despite the official announcement, the contraction was more modest than many analysts predicted and a marked improvement over the 3.8 percent contraction in the last three months of 2008, leading to an appreciation of the real against most major currencies.
With this news, policymakers are likely to slow the pace of interest rates cuts, which the central bank has been making in an effort to spur lending. Consumer spending and government spending slightly expanded in the first quarter, but capital spending fell by 12.6 percent, indicating that companies are reducing investments. According to the Brazilian government, the modest contraction is likely to boost capital investments, which officials believe will lead to positive growth in the second quarter.