Dollar Soars Amid Trump’s Threat to China and Fiscal Risks

On October 10, the US dollar reached a peak of R$5.50 in Brazil, marking its highest closing value in over two months. The surge was fueled by an international risk aversion wave stemming from escalating trade tensions between the United States and China, compounded by domestic fiscal concerns.

The Brazilian real experienced significant volatility throughout the day’s trading session. Initially dropping to a low of R\(5.3622 due to a brief, localized decline at market open, it consistently rose for the remainder of the day. The dollar reached an intraday peak of R\)5.5187 and closed with a 2.39% increase at R\(5.5037 – its highest closing value since August 5 (R\)5.5060). For the week, the dollar appreciated by 3.13%, pushing October’s gains to 3.39%. Despite earlier losses exceeding 14% this year, it now stands at a 10.95% decrease.

Market anxiety over potential populist measures from Brazil’s President Luiz Inácio Lula da Silva led the real to underperform against emerging market currencies and those of commodity-exporting nations. This was amid significant drops in oil prices by approximately 4%. Investors gravitated towards safer assets such as US Treasuries, whose yields fell, and gold.

The DXY index, which measures the dollar’s strength against a basket of six major currencies, had been climbing to its highest level in two months until it dropped over 0.5%, trading below 99,000 points with a low of 98.839.

Interbank senior economist André Valério noted that the day reflected a “flight to quality,” seeing dollar depreciation against developed country currencies and heightened demand for precious metals—a scenario reminiscent of reactions following Trump’s announcement of reciprocal tariffs in April. “Today was challenging for emerging market currencies and commodity exporters. For Brazil, we observed increased volatility due to issues surrounding the provisional measure (MP) and new housing credit policies. Additionally, government actions suggest a focus on electoral measures, jeopardizing next year’s fiscal targets,” Valério commented, referencing the recent repeal of an alternative increase in the Financial Operations Tax (IOF).

The dollar’s rise occurred in stages throughout trading. Initially heightened by concerns over Brazil’s new mortgage model, it spiked following reports that the government plans a R\(100 billion package for 2026. The proposed measures include income tax exemption up to R\)5,000 per month, contingent on Senate approval, free gas distribution, educational program scholarships (Pé-de-Meia), and electricity bill waivers for 17 million families.

These proposals face opposition in Congress, with the political landscape already focused on 2026 elections. “The market had been leveraging favorable external conditions while overlooking fiscal issues. It appears that the government will adopt an increasingly populist stance, employing maneuvers to meet fiscal targets,” noted Treviso Corretora’s foreign exchange manager Reginaldo Galhardo.

With deteriorating risk perception domestically, concerns escalated in the afternoon as global markets reacted negatively to Trump’s announcement of potential significant tariff increases on Chinese goods—a response to China’s restrictions on rare earth exports. China countered by emphasizing its right to regulate rare earths for national security and interest protection.

Investors may have used international market downturns to adjust positions or lock in profits, given the real’s strong appreciation over recent months, leading gains among emerging currencies in 2025. Despite fiscal worries and anticipated seasonal flux at year-end, Valério believes that widening interest rate differentials—due to expected US Federal Reserve rate cuts and Brazil’s Selic rate holding at 15% through December—could mitigate adverse impacts on the real.

原始文章来源：Diario de Pernambuco