The Real declined after Brazil’s debt rating was lowered to two levels below investment grade by Moody’s Investors Service, which cited the government’s failure to reduce its fiscal deficit amid deepening political turmoil.
The currency dropped 0.7 percent to 3.9864 at 9:50 a.m. in Sao Paulo. The outlook for the rating is negative, Moody’s said in a statement on Wednesday.
Brazil’s real is the world’s worst performing major currency over the past year after the nation lost its investment-grade rating from Standard & Poor’s in September and Fitch lowered it into junk territory in December. Brazil’s credit metrics have deteriorated “materially” in the past few months and are expected to continue to worsen over the next three years, according to Moody’s, which said growth will be “anemic” and political gridlock means President Dilma Rousseff will struggle to find backing in Congress for measures to raise taxes and reduce spending.
“While this cut was largely expected, it brings the focus back to the domestic situation,” said Georgette Boele, a foreign-exchange and precious metals strategist at ABN Amro Bank NV in Amsterdam. “Brazil is paralyzed by politics, the government is making an attempt to shore up fiscal accounts, but the political situation is not helping.”
Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, fell 0.015 percentage point to to 14.19 percent.