FX.co ★ Brazilian Real Weakens as Fed Hike Bets Rise

The Brazilian real depreciated to about 5.205 per USD, approaching the one-month low of 5.21 reached on August 14, as a more restrictive policy signal from Fed Chair Warsh strengthened the US dollar. Warsh emphasized that the Fed is tracking the PCE index as its primary inflation gauge, using firmer language than previous indications that a newly created task force might reconsider the central bank’s preferred measure. In response, rate futures shifted to more clearly price in the possibility of a Fed rate hike next month.

On the domestic front, Brazil generated 58,568 formal jobs in July, well below market expectations of 112,000 and sharply down from 145,161 in June. Inflation eased to 4.25% in the first half of August, moving below the BCB’s upper tolerance band of 4.5%. The softer labor-market and inflation figures could give the BCB room to maintain its current easing cycle of 25-basis-point cuts.

A Fed rate increase combined with a BCB rate cut would narrow the interest-rate differential between the US and Brazil, potentially reducing the attractiveness of Brazilian assets. Even so, Brazil’s unemployment rate fell to 5.3% in the rolling quarter through July, the lowest level since 2025.