In the first months of 2024, the real was one of the currencies that depreciated the most compared to the dollar and the euro. The real lost 7.7% against the dollar and 4.1% against the euro (over the period the dollar appreciated by 3.6% against the euro).

If we look at the table below, we are practically back to the situation at the end of 2022:

 20202021202220232024(*)
Exchange rate R$/US$ (end of the year)5,195,575,284,855,25
Exchange rate R$/€ (end of the year)6,386,315,645,375,60
Exchange rate US$/€ (end of the year)1,231,131,071,111,07

(*) up to 19/4/2024

But why did the real devalue so rapidly in the first months of 2024?

Let us remember that during 2023 the real appreciated by 9.4% against the dollar and 6% against the euro (therefore the euro devalued by 3.8% against the dollar). For the Brazilian currency, 2023 was a truly exceptional year.

At the beginning of 2024, the prospects continued to be positive, given that the dollar/real exchange rate considered “fair” (based on the fundamentals of the Brazilian economy compared to the US one) was around R$ 4.20.

Today we are at 5.25, confirming the fact that the exchange rate is considered “the cemetery of economists’ reputation”.

At the same time, an appreciation of the real against the euro could have been expected, presumably around 4.60/4.70 and instead we are going towards 5.60 reais for one euro.

So what happened in the first months of 2024?

The devaluation of the real is the reflection of both internal and external factors, but it is certainly the internal ones that caused a strong acceleration in the month of April.

In the external scenario, US inflation has stopped falling and the Federal Reserve is postponing the announcement of an interest rate cut. The dollar strengthened as investors increased purchases of US Treasury securities, which always pay very high interest. Capital, especially in times of global crisis, goes towards the safest shores and this explains why, from the beginning of 2024 to today, foreign investors have withdrawn around 6 billion dollars from the Brazilian stock exchange (Bovespa).

Much of the devaluation occurred in April, when the real was the currency that lost the most value in the world compared to the dollar, as this graph shows:

This strong acceleration can only be attributed to internal Brazilian factors. In particular, there was the announcement by the Brazilian government that it wanted to change the fiscal surplus objectives during President Lula's mandate, which expires at the end of 2026.

For 2024 the goal is no longer to balance the public accounts, but a deficit of 0.5% is expected; for 2025 we went from a forecast surplus of 0.5% to breakeven; for 2026 we will go from a surplus of 1% to one of 0.25%.

What to expect in the coming months?

As always, it must be kept in mind that the foreign exchange market is very volatile and that its performance is not very predictable.

The devaluation of the real may cause a resurgence of inflation and consequently slow down the downward path of the discount rate (SELIC) started already in 2023 by the Central Bank and slow down the growth of Brazilian GDP.

Economists estimate that the exchange rate at the end of 2024 will be around 5 dollars per real: therefore a gradual revaluation of the Brazilian currency should take place in the coming months.

The exchange rate considered "fair" - considering the economic fundamentals - is well below this value, around 4.60 reais per dollar, but to get close to this value it will be necessary for the government to do its part, controlling public spending in a serious and responsible manner.

Another important variable concerns the demand for commodities at a global level: the recovery of the Chinese economy, the main importer of Brazilian products, continues to be a great unknown.