Brazilian Real Hits Historic Low: What It Means & Where It's Headed

• The Brazilian Real fell below 4 Reals per U.S. Dollar on Tuesday, setting a new record for an all-time low, as the North American currency continued to gain strength versus emerging market currencies like the Indonesian rupiah.
• One U.S. Dollar is now worth more than $4.05 Reals. This means the Brazilian currency fell about 1.68 percent on Tuesday.
• The Sao Paulo Stock Exchange and U.S.-listed Brazilian ADRs are also tumbling on Tuesday trading.

Since its debut in 1994, the Brazilian real had never been less valuable in relation to the U.S. Dollar. On Tuesday, the currency fell to a new all-time low, driven by several elements among which investors can count the political turmoil in Brazil and the recently announced austerity measures, S&P’s downgrade of the country’s credit rating, and the corruption scandals surrounding state-controlled Petroleo Brasileiro SA - Petrobras (ADR) PBR.

Other analysts, like Citigroup’s Luis Costa, also attributed the decline, in part, to the worries generated by the Volkswagen AG (ADR) VLKAY emissions scandal.

Related Link: S&P Cuts Brazil To Junk: What It Means

Year-to-date, the Brazilian Real has lost one third of its value.

The Sao Paulo Stock Exchange also fell about 2.4 percent on Tuesday, with the Bovespa index now standing at 45,486.63 points. The exchange has lost more than 9 percent since the beginning of the year.

Meanwhile, experts expect the country’s economy to contract about 3 percent this year (well above the government’s 1.49 percent projection), as inflation gets close to double digits and unemployment continues to surge.

Alberto Ramos, economist with Goldman Sachs, assured the currency will likely continue to decline. “I don’t see any immediate anchor to it — there is nothing here that leads me to see a point where things will stabilize,” he said.

In a recent report on Public Development Banks and their impact on Brazil, Monica de Bolle, of the Petersen Institute for International Economics, explains, "Brazil is trapped in a complex web of fiscal and quasi-fiscal entanglements. Following several years in which these problems were either hidden from view by the afterglow of the commodity boom that ended in 2011 or justified on the basis of anticyclical policy needs, they now have come to a head. As a country faced with severe growth constraints associated with a political crisis, structural bottlenecks, and macroeconomic imbalances, it is unclear how it will exit from what some have dubbed the perfect storm."

Disclosure: Javier Hasse holds no stakes in any of the securities mentioned above.