Brazil FX has overshot, equilibrium rate around 4.50 reais per dlr -econ minister

BY Reuters | ECONOMIC | 04/08/21 12:34 PM EDT

By Jamie McGeever

BRASILIA, April 8 (Reuters) - The equilibrium level for Brazil's exchange rate is probably around 4.50 reais per dollar, Economy Minister Paulo Guedes said on Thursday, adding that he expects the currency to strengthen in the coming months having overshot to the downside.

The real was one of the worst-performing currencies in the world last year, losing 30% of its value against the dollar, and has shed a further 7% this year as the country's deteriorating fiscal outlook has spooked investors.

Speaking in a live online event hosted by Brazilian-American Chamber of Commerce, Guedes said he was confident the government's economic and fiscal reforms, mass vaccinations against COVID-19 and a recovering economy will soon see the exchange rate rebound.

"The (dollar) exchange rate is higher. Probably it should be around 4.50 by now. It did make an overshoot. In three or four months ... probably the (dollar) exchange rate will go down," Guedes said.

"I would be very cautious to bring money from abroad when we had double digit exchange rates and an over-valued exchange rate. I would be very willing to bring money from abroad now. I don't think I would lose money if I move and invest now," he added.

The real had depreciated by more than 10% against the dollar earlier this year, approaching last year's record low near 6.00 per dollar.

Although the central bank raised interest rates last month and is poised to do so again next month, it remains under pressure. Investors are skeptical the government can reduce its record debt of 90% of gross domestic product, or avoid breaking its key 'spending ceiling' fiscal rule.

At the same time, inflation is running at over 5% and likely to rise further, well above the central bank's year-end target of 3.75%. Guedes said fiscal discipline from the government and rising interest rates should rein it in.

"In a few months I think it will subside and we'll still be moving inside our inflation targets," he said.

($1 = 5.57 reais) (Reporting by Jamie McGeever Editing by Marguerita Choy)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.