Dollar Declines as Election Race Tightens: What Changes

The spot dollar was down 0.32% this Wednesday morning (5), trading at R$ 5.116, after a Genial/Quaest poll revealed a smaller gap between President Lula and Senator Flávio Bolsonaro in the 2026 election race. This movement reflects a market reading that deserves attention: a tighter race may paradoxically benefit the real in the short term.

The logic is not intuitive, but it makes sense when analyzed from the investors' perspective. A more competitive election signals that the government needs to deliver concrete fiscal results to maintain political viability. This reduces the likelihood of populist adventures with the budget in the months leading up to the election. At least, that is what the exchange rate is currently pricing in.

Why the Election Poll Affects the Exchange Rate

The Brazilian exchange rate has historically been sensitive to electoral cycles. In 2022, the dollar fluctuated by more than 10% between March and October, following changes in voting intention polls. The pattern is repeating in 2026, but with different nuances.

The Quaest poll showed a reduction in Lula's lead over Flávio Bolsonaro, which the market interprets in two simultaneous ways. First, a more competitive scenario pressures the government to maintain fiscal discipline, avoiding measures that scare off investors. Second, the possibility of a power shift is not seen as alarming by the financial market, which views Bolsonaro as more aligned with economic liberalization agendas.

The net result this morning was a drop in the dollar. The futures contract for September, currently the most liquid, fell 0.22% on B3, trading at R$ 5.146. Abroad, the dollar also lost strength against most currencies, amplifying the domestic effect.

Copom Decides on Selic Today with Expectations of First Cut

The other factor dominating the exchange rate today is the decision of the Central Bank's Monetary Policy Committee, expected in the late afternoon. Market consensus points to a 0.25 percentage point cut in the Selic rate, currently at 14.25%. This would be the first cut of the cycle, signaling that the Central Bank considers inflation sufficiently controlled to begin a gradual easing.

However, the magnitude of the cut matters less than the accompanying statement. The market wants to understand the pace intended by Copom. A 0.25 point cut with cautious language would be interpreted as a sign that the Central Bank is not in a hurry, which tends to keep the interest rate differential attractive for the real. As we discussed in our monetary policy coverage, the current level of the Selic is one of the highest real interest rates in the world, and even with gradual cuts, Brazil will remain at the top of this ranking for months.

The rate of 14% per year, if the cut is confirmed, still leaves Brazilian real interest rates above 8%, considering Focus inflation projections. For comparison, the real interest rate in the United States hovers around 2%. This differential supports the attractiveness of carry trade, a strategy where investors borrow dollars to invest in Brazilian bonds.

Weak Data in the U.S. Reinforces Global Dollar Decline

The external scenario contributed to the dollar's decline this morning. The ADP report, which measures job creation in the U.S. private sector, reported only 44,000 jobs in July, well below the 70,000 projected by economists consulted by Reuters. The weak number fuels the thesis that the American economy is slowing down, which could lead the Federal Reserve to be more aggressive in cutting rates.

If the Fed cuts rates more aggressively in the coming months, the differential between American and Brazilian rates widens, making the real even more attractive. This dynamic is already reflected in the flows: as we showed in our analysis of the exchange market, foreign capital inflow into Brazilian fixed income has been consistent throughout 2026.

Weaker employment data in the U.S. also reduces pressure on the dollar globally. Of the 23 most traded currencies in the world, most were rising against the American currency this morning. The DXY index, which measures the dollar's strength against a basket of currencies, was down.

What Investors Should Watch Going Forward

The Brazilian exchange rate is currently facing a convergence of three forces: the electoral cycle, domestic monetary policy, and economic data from the United States. The interaction between these variables will determine whether the dollar breaks the R$ 5 level in the coming months or finds support near R$ 5.10.

On the electoral side, the market is expected to react with volatility to each new poll. The experience of previous cycles shows that the exchange rate's sensitivity to polls increases as the election approaches. For those monitoring the macroeconomic impact of elections, the pattern suggests that the second half of 2026 will be marked by more intense fluctuations.

On the monetary side, the Copom statement tonight is the most relevant event of the week. A dovish tone could provoke additional short-term declines in the dollar, but it could also create noise if the market interprets that the Central Bank is being lenient with inflation. The balance is delicate.

And on the external side, the official U.S. payroll report, due out on Friday, will be the definitive test for the thesis of American slowdown. If it confirms the weak ADP data, the dollar could face additional global pressure, benefiting emerging currencies like the real.

The scenario, for now, favors the real. But in an election year, exchange rate projections have a short shelf life.