US Dollar
Key events affecting currency markets in the first half of 2026:
- Conflict with Iran
- Uncertainty at the US Federal Reserve
- Potentially higher US interest rates
- Strong oil price
- Inflation concerns in many countries.
Of the currencies covered, the US dollar (DXY) stood out, appreciating 2.7% in 1H 2026. Higher oil prices, strong economic numbers like employment, and anticipation of the US Fed raising rates later this year drove demand for the US dollar.
Brazil
Versus the US dollar, the Brazilian Real was a standout performer; the Real was up 3.9% versus the US dollar in 1H 2026. First, Brazil has been a net oil exporter since the mid-2010s with its key market being China. As Iran is also a big supplier to China, Brazil was able to pick up share in China with the drop in Iran's production. Second, the yield differential between the Brazilian Real and US dollar on a 10-year maturity basis is large; the average Brazilian 10-year yield in 1H 2026 was 9.69% greater than the US yield. Adding the currency move of 3.9% versus the dollar, a dollar investor in Brazilian bonds did very well.
Brazilian Risk
Inflation is always a risk to the Brazilian Real and bond yields. Brazil's annual inflation rate rose from 4.44% in January 2026 to 4.72% end of May. The June number will probably not be bad as the monthly numbers in March, April, and May have been declining.
Government debt has long been a risk in Brazil. The most recent level of Government Debt to GDP was end 2025 at 78%. Given that 2026 is a presidential election year, it is hard to imagine the incumbent president Lula da Silva has cut spending and reduced debt. A surprisingly bad number, a number above its 2020 high of 86%, would be concerning. Any move above 80% is a risk to the currency and interest rates.
Brazilian Outlook
Given inflation in Brazil is moderating and there is room to raise debt to GDP before investors get overly worried, the outlook for the Real versus the US dollar in 2H 2026 looks good.
Key Data Points to Watch in 2H 2026
- Inflation
- Trend in government debt to GDP
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