Dollar operates lower, with cautious market awaiting US inflation

O dollar fell 0.35%, quoted at R$5.419, around 9:17 am this Wednesday (13), amid investor caution ahead of the release of the Consumer Price Index (CPI) of the United States referring to the month of July.

The expectation is that the indicator will give more clues about the next steps of the Federal Reserve in the fight against the greatest inflation in 40 years in the country. Depending on the level recorded, the market will expect a more aggressive cycle of interest rate hikes by the local authority, which would increase the chances of a recession and also increase risk aversion on the part of investors.

In Brazil, investors monitor the voting of the Benefits PEC in the Chamber of Deputies, with concerns about the volume of government spending. The return on fiscal risk favors the dollar against the real driving away foreign investment.

On Tuesday (12), the dollar rose 1.27%, to R$ 5.439, the highest value since January 24. already the Ibovespa advanced 0.06%, to 98,271.21 points.

overall feeling

Investors still maintain a strong global risk aversion triggered by fears about a possible general economic slowdown due to a series of interest rate hikes around the world to contain record levels of inflation, which would harm many types of investments.

The main cause for this aversion is the cycle of high interest rates in United Stateswith the most recent increase announced by the Federal Reserve on May 4th. The increase was 0.75 percentage point, the biggest since 1994, and new highs of the same magnitude were not discarded .

Higher interest rates in the United States attract investments to the country’s fixed income due to its high security and favor the dollar, but harm bond markets and stock exchanges around the world, including the US.

However, the country’s fight against highest inflation in 40 years raises growing fears of a recession in the world’s largest economy due to the need for aggressive monetary tightening. The risk leads to an aversion to risk, favoring the dollar and harming assets considered risky, in the case of the Brazilian market.

On the other hand, new restrictions in cities in the China were announced in early July, reversing a scenario of optimism about a resumption of the country’s economy after months of lockdown in Shanghai and Beijing. The picture reinforces fears of a Chinese economic slowdown and consequent drop in demand for commodities.

In the domestic scenario, the Benefits PEC which creates or expands social benefits with an estimated cost of R$ 41 billion, was poorly received by the market, as it reinforces the fiscal risk by bringing new spending above the ceiling.

With the combination of adverse internal and external environments, the withdrawal of investments harms the Ibovespa and favors the dollar against the real.

*With information from Reuters