Since the end of August, emerging market currencies have generally depreciated against the US dollar. The Brazilian real has been the worst performer among those that we track. Although the real effective exchange rate is now almost 15% below its ten-year trend, other metrics suggest the currency remains overvalued. For example, the price level in Brazil is higher than might be expected given the country’s GDP per capita. And Brazil has a large current account deficit. Indeed, the country’s reliance on foreign capital ahead of a shift in Fed policy appears to be the main reason why the real has come under renewed pressure lately.
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