Real run done?

Brazil, the region's largest economy, has had an incredible bull run in its currency, the real, over the past several years. From a high of nearly 4.00 in late 2002, the U.S. dollar/Brazilian real (USD/BRL) rate fell dramatically to around 2.051 in early May 2006 (reflecting a weakening dollar, strengthening real).

Many factors were behind the dramatic bull move in the real, including extremely high domestic overnight interest rates (which topped at 19.25 percent), booming commodity prices, and a sizable trade surplus. It shows the Brazilian real futures contract, which reflects the uptrend in the real rather than the decline in the dollar.

Nonetheless, the real and other Latin American currencies, including the Argentine peso, Chilean peso, Columbian peso, and Mexican peso, took sharp hits this spring.

“In May and June we saw a lot of weakness and a lot of volatility,” de la Fuente says. “Except for Brazil, all the currencies have posted declines of 8 to 10 percent this year.

We’re in a process of repricing risk because central banks in the industrialized world are raising interest rates.” In late June the real, which had plummeted 14.37 percent in May, was down only around 6 percent from its early-May high, and was still up on the year.