Brazil real hits historic low at 6.26 per dollar amid concerns over President Lula’s efforts to curb government spending

Brazil real hit a historic low against the U.S. dollar on Wednesday, marking its weakest level since its introduction in 1994. Investor concerns over President Luiz Inácio Lula da Silva’s fiscal measures to curb government spending have intensified the decline. The currency fell 2.8% in a single day to settle at 6.26 per dollar and has depreciated nearly 23% against the dollar this year.

At the heart of the crisis is a proposed bill backed by Lula that seeks to cut 70 billion reais ($11 billion) in government spending. While some less controversial provisions of the bill passed in the lower house late Tuesday, key measures, including caps on minimum wage increases, remain under debate. The uncertainty has created a storm in the markets, with many analysts viewing the measures as inadequate to address Brazil’s economic challenges.

Economists warn that the real’s continued weakness could have far-reaching consequences. A depreciating currency will push up the cost of imports, potentially reigniting inflation as early as January. Brazil’s central bank has repeatedly intervened to stabilise the real, but the measures have yielded limited success so far.

Mario Sérgio Lima, an analyst at Medley Advisors, noted that market confidence remains shaky. “The government’s package is seen as insufficient and is likely to be watered down in Congress. At 6 per dollar, the real is tolerable, but 6.30 would be excessive.”

President Lula, who is recovering from surgery for a brain bleed, downplayed market concerns in a recent interview. “It’s not the market that needs to worry about government spending; it’s the administration. Overspending affects the poor, not the wealthy,” he told TV Globo.

Meanwhile, Economy Minister Fernando Haddad attempted to calm fears, attributing the real’s depreciation to temporary market speculation and political uncertainty. Haddad emphasised that Brazil’s economy remains stable, citing improved inflation and unemployment figures.

The coming days will be critical as Congress races to debate and vote on the fiscal package before adjourning on Friday. Whether the measures will satisfy markets and prevent further devaluation of the real remains to be seen.