Falling Dollar

[Big Daddy]

The dollar has reached the lowest since I have been checking. Even Wan Hallen is complaining that the dollar is just not what it used to be. The real is listed at 2.61. In May I was getting 3.15 and in November it was down to 2.85. Brasil is still a great place to visit.

[trilingual]

Even at the current rate Brazil is still a good place to visit, but for those of us spending a lot of time here, the difference is becoming noticeable. Since it's the first of the month I had to change a lot of dollars to meet my February rent and other expenses, and the impact when you need to buy several thousand reais is a bit painful! :-(

 

The real is starting to feel overvalued, however. The economy is improving in Brazil, but it hasn't improved so much that the real should be that much more valuable. The government and exporters are NOT happy about this, because if it continues it'll make Brazilian exports more expensive. The consensus is that the real should be worth between R$2.80 to R$3.00 to the dollar for the good of the economy, and forecasts suggest that this should be the value by the end of the year. Argentina, whose peso has been nearly at par with the real for much of the past year, has managed to maintain an exchange rate closer to A$2.95 pesos to the dollar, making it a cheaper destination to visit at the moment (although no saunas with boys in Argentina).

 

In the past (like most of the 20+ years I've been coming to Brazil) the dollar has always gotten weaker this time of year because of the hordes of tourists with lots of cash dollars in hand, so the market is swimming in dollars. Once the high season ends, the dollar has always tended to strengthen. I imagine that will happen again this year. However, the current strength of the real is surprising. This year we've seen a larger fluctuation than usual. Only time will tell if the prognosticators are correct and the real will return to something near the R$3 range. I sure hope it does!

[imrthr]

>

>The real is starting to feel overvalued, however. The economy

>is improving in Brazil, but it hasn't improved so much that

>the real should be that much more valuable. >

 

What about inflation in Brazil! When I stayed at Atlantico Hotel in October of 2003 the daily rate for a junior suite was R$180.00 + 10%. Today the rate is R$230.00 + 10% for the same room.

 

It does not take a genius to see that the increase in the room rate is nearly 30% over the past seventeen months. Has inflation in Brazil been anything like that much?

 

On the other hand, in Sao Paulo the Bourbon Hotel, which is popular among many m4m people, has decreased its daily rate. Is it possible that Rio is having enormous inflation while Sao Paulo is not?

 

I have also stayed at hotels in other cities in Brazil. I compared the current daily hotel rate to the daily rates listed in various tour guide books and did not see anything like the inflation that has occurred at Atlantico Hotel.

 

I noticed a slight increase in restaurant prices in Rio but those increase are nothing like the increase at Atlantico Hotel.

 

Has anyone else observed inflation similar to Atlantico's increase?

[trilingual]

There's inflation in Brazil, but last year's was in the high single-digits for the first time in many, many years. I can understand prices maybe going up about 10%. 30% is way too much, but in the case of the Atlântico it may just be that there's enough demand for their rooms that they can afford to increase their rates by that much. (You're still likeliest to get the best rates reserving through Carlo Romano, who's worked out pretty good discounts with them.) Room rates in SP tend to be more reasonable, because there are many more hotels and rooms available than in Rio. Especially downtown, which is no longer the premier business destination. Especially on weekends, when they're really anxious to fill rooms! But believe me, if you stay out in the new Hilton in the Faria Lima area, for example, you'll pay first world prices!!!

[sf traveler]

I noticed the inflation at the Atlantico some time ago and that was one major reason I switched my business to the Royal Rio. The Atlantico was fine at the original prices but after the increase, I felt it was overpriced for the quality of the facilities.

 

On the more important note of exchange rates, I have to, unfortunately, disagree with my good friend Tri. The real is high because of a combination of good economic results in Brazil and dollar weakness, which anyone who's been to Europe lately can testify to. When I first went to Brazil in 2002 the dollar was at 2.2 to the real. Subsequently, the real took a plunge to 4 when the markets were fearing the arrival of Lula, the leftwinger, in the presidential palace. Once elected, however, Lula adopted quite orthodox economic policies, which have worked relatively well in increasing exports and creating employment. If only George Bush had followed such conservative economic ways! In any case, the real has continued to appreciate over the last year or so. While it's true that the government would like a lower rate, they are also increasing domestic interest rates, which is likely to cause the real to appreciate even further. Given this, it is unlikely that the central bank will intervene in the currency markets to any great extent. Thus, unless the dollar gets stronger generally, or unless the real suffers some unforeseen problem, I believe the current rate, or worse, is in our future for some time. Oh well, at least I'll be thrilled if I'm wrong. SF Traveler

[Guest msclonly]

Brazilian Stock market is one of the best to invest in.

 

Look at what the Brazilian stock market is doing and you will see, that it is tops in the world!

 

:+

[trilingual]

RE: Brazilian Stock market is one of the best to invest in.

 

Both the Brazilian and Argentine stock markets have had spectacular recoveries in the past year or so. Wish I'd kept some of my money in a Latin American mutual fund! I'd be in a lot better shape!

 

There's a long column on exchange rates in today's "Globo." The government has been intervening in the market by buying millions of dollars, but so far it hasn't had much effect. The strategy is two-pronged: to stabilize the exchange rate and also for the Central Bank to take advantage of the weak dollar to build up Brazil's foreign currency reserves, which are growing rapidly. The column points out that so far the means by which the Central Bank is buying dollars have brought in cash from abroad, which doesn't particularly contribute to stabilizing the exchange rate. What the government needs to do is try to soak up a chunk of the dollars circulating internally in Brazil. Coincidentally, it seems, another article in today's paper suggests that the Central Bank is about to do exactly that, with some instruments designed for the local market. So we'll see.

 

SF Traveller is right that Brazil is also working at cross-purposes to itself. It's hard to maintain the desired 3:1 exchange rate when Brazilian interest rates are among the world's highest. That makes Brazilian bonds very attractive to foreign investors looking for high returns, which means that they're purchasing reais to buy the bonds and, in the process, increasing the demand for reais, which pushes up the price. The outrageously high interest rates here are a matter of great controversy, and I suspect that they'll start reversing track and begin coming down if the economy keeps growing steadily with moderate inflation. After decades of hyper-inflation, the Central Bank is extremely cautious (overly so in the opinion of many commentators) about doing anything that might reignite inflation. But the pressure to reduce interest rates is very strong, because the current high rates are stifling growth and limiting the economic recovery Brazil is experiencing. If interest rates start dropping, the real will weaken, too.

 

The market here is pretty sophisticated, though, and according to the column CFSB should be issuing it's next prediction of the real's value at the beginning of March. It'll be interesting to see if they maintain their current prediction of a 3:1 rate by the end of the year. As I pointed out in a post above, historically the real has been strongest this time of year (the peak of the tourist season) and it tends to weaken once the tourists (and their hundreds of millions of cash dollars) begin to vanish from the scene. So based on past experience, I expect the dollar to start increasing in value after Carnival is over. On the other hand, since Brazil is still a bargain (especially for Europeans) tourism is now more spread out over the year. The low season isn't a desert, as it used to be. That means more cash dollars in circulation, even in "low" season, so the dollar may not strengthen as much as it has in the past. But, again as SF Traveller points out, there are a lot of other factors in play, too, including the values of the dollar, euro and yen in the international markets, which also affect the value of the real. Put all of that together, and predicting becomes kind of difficult. However, I can't help feeling that the euro is unrealistically over-valued right now, and will eventually have to come down. Europe's fundamentals just don't seem to justify the current high value of the euro, and if the U.S. economy continues growing (in spite of the staggering deficits) and outpacing Europe, the value of the dollar should increase, especially if U.S. interest rates continue rising. That in turn should affect the dollar-real exchange rate. So stay tuned, because the currency market can be a real roller-coaster and you never know for sure what's around the next turn!