USD/BRL holds ground near 5.60 after rising sharply due to Trump’s 50% tariff on Brazil
- USD/BRL appreciated as Trump announced a 50% tariff on Brazilian imports, up from the previous 10% rate.
- President Trump defended his decision by accusing Brazil of engaging in unfair trade practices.
- The recent FOMC Meeting Minutes suggested uncertainty surrounding the Fed’s policy outlook.
USD/BRL remains stronger after registering approximately 2.5% gains in the previous session, trading around 5.60 during the European hours on Thursday. The pair appreciated as the Brazilian Real dropped sharply after US President Donald Trump announced a 50% tariff on Brazilian imports, effective August 1, up from the previous 10% rate imposed in April.
President Trump justified his move by accusing Brazil of engaging in unfair trade practices and, notably, as retaliation for the ongoing trial of Brazil’s former President Jair Bolsonaro, who faces serious charges related to efforts to overturn the 2022 election results. In response, Brazilian President Luiz Inácio Lula da Silva vowed to retaliate by invoking its Law of Economic Reciprocity.
Additionally, Brazil is facing declining prices for major exports such as crude Oil and iron ore, leading to reduced foreign currency inflows. Meanwhile, a surprise widening of the June trade deficit and an unexpected drop in industrial production have further dampened prospects for a near-term economic recovery.
The upside of the USD/BRL could be restrained as the US Dollar (USD) faces challenges due to rising trade concerns and uncertainty surrounding the Federal Reserve’s (Fed) policy outlook. The latest Federal Open Market Committee (FOMC) Minutes from the June 17–18 meeting, released on Wednesday, indicated ample uncertainty and a divide within the Fed policymakers on how tariffs will impact inflation going forward.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.