SAO PAULO (AP) — Brazil’s real fell Wednesday to its weakest level against the dollar since the currency was introduced in 1994, undermined by investor frustration over President Luiz Inácio Lula da Silva’s efforts to rein in government spending to keep.
A bill backed by Lula that aims to cut 70 billion real ($11 billion) in government spending is being debated in Brazil’s lower house. But some market players say this is not enough to support Brazil’s finances.
The real lost 2.8% of its value against the US dollar on Wednesday, falling to 6.26 per dollar. It is the weakest currency it has been in nominal terms since its introduction in an economy with a history of boom and bust cycles and periods of high inflation.
This year it has lost almost 23% of its value against the US currency.
Brazil’s lower house passed some less divisive elements of the bill on Tuesday evening, but key parts – such as limits on minimum wage increases – have yet to be put to a vote. The Senate must also vote on what the lower house approves, and Congress adjourns on Friday.
Brazil’s central bank has repeatedly intervened in local currency markets to stem the real’s decline, but has so far largely failed to stop the bleeding. Economists say the currency’s weakness, which will raise the cost of Brazilian imports, could lead to inflation as early as January.
“The administration has sent a package that is seen as insufficient, and it will be watered down in Congress. It is also accompanied by a measure to increase spending through income taxes,” Medley Advisors analyst Mario Sérgio Lima told The Associated Press. “The real of 6 per dollar seems acceptable, but almost 6.30 seems excessive.”
Lula, who is recovering from surgery to stop a brain haemorrhage, told TV Globo on Sunday that his government is being fiscally responsible and downplaying concerns in financial markets.
“It is not the market that needs to worry about government spending. It’s our administration. If I don’t control spending, if I spend more than I have, the poor people will pay for it,” the Brazilian president said.
Brazilian Economy Minister Fernando Haddad said the sharp depreciation of the real does not reflect the reality of the country’s economy, noting that inflation and unemployment rates are improving.
“Some are talking about speculation, including respectable journalists,” Haddad told reporters in the Brazilian capital Brasilia, without giving more details. “Our currency is floating and right now when some things are pending (in Congress), there is an atmosphere of uncertainty that is causing the currency to float. But I believe it will find its footing.”
