Currency and Exchange Raten in Brazil

In order to combat the hyper inflation in Brazil, the new currency Real was launched in July 1994. In the beginning, the new currency was pegged to the US dollar at the ration 1:1, with an allowable slip of some 10% per year. The consequence of the launch was that the new currency became overvalued, and had to withstand several attacks from the market the coming years.
• First came the Asian crisis year 1997, but the Central Bank was strong enough to withstand a devaluation.
• Then followed the Russian crisis at the end of year 1998, when the Central Bank finally gave up and adopted a floating exchange rate system. The currency devalued from 1.2 to 2.0 Real per $US dollar in a couple of weeks time.
• The currency stayed at this level until the beginning of year 2001, when Brazil went into an energy crisis which forced large segments of the industry to cut back on their production. The currency went to 2.5 Real per $US.
• In April 2002 it was clear that the left wing leader Lula was leading the poll in the presidential election. The market got scared and the currency started to weaken again, reaching 4 Real per $US some months later. When the new president declared that the government would run a prudent and responsible economic politic, the currency stabilized around 3 Real per $US.
• The new government kept what it promised and the confidence from the market players returned, in parallel with an increasing export. The currency then started to strengthen in mid 2004, reaching close to 2 Real per $US.

Considering the roller caster that the currency Real has gone through the last 12 years, one could wonder what is a fair and justified value of the Real over longer term. The simplest and best answer on this question is that nobody knows, and it is routine that experts on currencies and their values fail in their forecasts.
The reason why the Real currency has strengthened so much the last 2 years can be explained by a strong growth of the Brazilian economy, high yield on government notes, strong development on the stock market BOVESPA, and increasing surplus of the trade balance, factors that all lead to a stronger demand for Real.
It can be worth noting that the economic growth is expected to grow more moderately this year, that the trade balance is no longer growing, and that the short term interest rate has decreased 4% the last 4 mounths. This does not automatically mean that the Real will start to weaken again this year, but it suggests that somewhere in future the currency could adjust to these changes.

	The Currency Exchange Rate the Last 10 years	April 2005

In order to combat the hyper inflation in Brazil, the new currency Real was launched in July 1994. In the beginning, the new currency was pegged to the US dollar at the ration 1:1, with an allowable slip of some 10% per year. The consequence of the launch was that the new currency became overvalued, and had to withstand several attacks from the market the coming years. • First came the Asian crisis year 1997, but the Central Bank was strong enough to withstand a devaluation. • Then followed the Russian crisis at the end of year 1998, when the Central Bank finally gave up and adopted a floating exchange rate system. The currency devalued from 1.2 to 2.0 Real per $US dollar in a couple of weeks time. • The currency stayed at this level until the beginning of year 2001, when Brazil went into an energy crisis which forced large segments of the industry to cut back on their production. The currency went to 2.5 Real per $US. • In April 2002 it was clear that the left wing leader Lula was leading the poll in the presidential election. The market got scared and the currency started to weaken again, reaching 4 Real per $US some months later. When the new president declared that the government would run a prudent and responsible economic politic, the currency stabilized around 3 Real per $US. • The new government kept what it promised and the confidence from the market players returned, in parallel with an increasing export. The currency then started to strengthen in mid 2004, reaching close to 2 Real per $US. Considering the roller caster that the currency Real has gone through the last 12 years, one could wonder what is a fair and justified value of the Real over longer term. The simplest and best answer on this question is that nobody knows, and it is routine that experts on currencies and their values fail in their forecasts. The reason why the Real currency has strengthened so much the last 2 years can be explained by a strong growth of the Brazilian economy, high yield on government notes, strong development on the stock market BOVESPA, and increasing surplus of the trade balance, factors that all lead to a stronger demand for Real. It can be worth noting that the economic growth is expected to grow more moderately this year, that the trade balance is no longer growing, and that the short term interest rate has decreased 4% the last 4 mounths. This does not automatically mean that the Real will start to weaken again this year, but it suggests that somewhere in future the currency could adjust to these changes.