The U.S. dollar-to-real exchange rate is on track to end the year far above the R$5 level once forecast by financial markets in December 2023. Investors no longer expect any lasting relief for Brazil’s real going into 2025. Despite the likelihood of tighter interest rates, analysts widely expect the exchange rate to stabilize at around R$6 next year—citing the dollar’s global strength and persistent fiscal risks at home.
A survey by Valor among 75 financial institutions and consultancies showed a median estimate of the exchange rate per U.S. dollar at R$6.00 in December 2025. If realized, that level would mark a 2.87% decline from Thursday’s closing of R$6.17. Such a trend would contrast sharply with this year’s exchange rate performance, in which the dollar climbed 27.3%. The U.S. currency ended 2023 at R$4.85.
At the end of last year, even the most pessimistic forecasts for the real’s performance failed to foresee today’s exchange-rate levels. Record trade surpluses in 2023 had created a sense that these strong trade flows could continue, buttressing the real. However, a mix of unfavorable external factors and worsening perceptions of Brazil’s fiscal risks has facilitated the FX rate’s robust climb throughout 2024.
C6 Bank was one of the few that came close to predicting the current exchange rate levels in forecasts issued late last year. Chief Economist Felipe Salles said he believed the U.S. economy would not slow down and that Brazil’s public debt path would remain unsustainable—both factors keeping the real under pressure. His outlook for next year stayed largely unchanged.
Besides anticipating no significant U.S. slowdown, Mr. Salles pointed out that policy proposals announced by President-elect Donald Trump are likely to reinforce the dollar’s global strength. Domestically, he believes Brazil’s rising debt burden will continue to weigh on the real, even with additional interest-rate hikes.
“When interest rates go up, the public debt trajectory worsens,” he said. “That’s not so problematic when the debt is small, but it becomes worrisome when the debt is large, which is our case. This situation may lead to risk aversion, essentially canceling out or offsetting the typical carry trade effect,” he explained. He added that tighter credit conditions might be hindering monetary policy transmission.
“We understand fiscal dominance as a situation where monetary policy stops being effective,” he observed. “It’s not a binary scenario of either zero or one; it unfolds in stages. Between complete normality and fiscal dominance, there are infinite shades. It appears we are starting to see some signs of that.”
C6 projected the exchange rate per U.S. dollar at R$6.00 by the end of 2025—slightly lower than current levels—partly because it expected additional government measures. “When the FX rate rises too much, there’s almost always some reaction,” Mr. Salles said. “I believe the government will eventually introduce new spending cuts. They won’t be enough to stabilize the debt, but they should move the needle a bit. Still, the risk of an even stronger dollar outweighs the chance of the FX rate going below that mark.”
Economist Marco Antonio Caruso of Santander also placed the FX rate per dollar at R$6.00 for 2025. He prefers alternative risk metrics like the yield curve’s slope, noting that the Credit Default Swap (CDS) spread only recently began to rise in response to heightened domestic risk. “Some models pointed to an overreaction in the exchange rate,” he said. “The problem is that risk perception is still deteriorating, fueled by concerns of friction between monetary and fiscal policy ahead of the elections.”
Given that ongoing risk aversion has lingered, Mr. Caruso expects the exchange rate to remain near its present levels through late 2025. “Idiosyncratic risk is huge, and global conditions won’t help given a stronger dollar worldwide,” he noted. “Although there could be some market overshoot, the negative sentiment appears persistent. And, as we head into elections, it isn’t hard to imagine these current worries intensifying.”
Mr. Caruso argued the “reversal” of typical fiscal policy cycles—under 2022’s Transition PEC—added to the country’s woes, pointing out that any fiscal tightening so far has relied on higher revenues rather than spending cuts. “Why would the risk premium suddenly change, and why wouldn’t it become worse by 2026?” he asked. “If we were in line with our peers, the FX rate might be at R$5.60, but it’s not. Our alpha—or the degree to which this depreciation is our own doing—is over one standard deviation. We’ve seen worse in 2014 and between 2019 and 2020. Things can certainly get worse and remain that way.”
In his view, Brazil is also losing some of the currency’s prior support mechanisms. “We no longer have the ‘marginal seller’ of dollars, namely foreign investors,” he said. “Over the past two or three months, we lost the foreign counterweight that often steps in when it sees the market overshooting. Those real-money investors—pension funds, for instance—also appear to have cut back on Brazilian exposure and left.”
Banco Fibra Chief Economist Marco Maciel noted that investors had been overly optimistic about spending cuts in Brazil’s fiscal package. “It’s unrealistic to expect a left-leaning government to enact broad spending reductions on vulnerable segments,” he said. Mr. Maciel estimated that 65% to 70% of the real’s depreciation this year could be blamed on fiscal issues, predicting no improvement in 2025. He added that a Supreme Court decision to suspend earmarked parliamentary funds would likely hamper efforts to rebuild the country’s tax base.
Mr. Maciel projected that the real could weaken further against the U.S. dollar in 2025, ending the year at roughly R$6.75.
(Anaïs Fernandes and Marta Watanabe contributed reporting.)
