The Brazilian real (BRL) has become the best-performing emerging market currency since the start of 2025, second only to the Hungarian forint. But according to Robin Brooks, a senior fellow at the Brookings Institution and former chief FX strategist at Goldman Sachs, the rally still has significant room to run. Brooks believes a “perfect storm” is forming that could push the USD/BRL exchange rate below 4.50 – what he considers the currency’s fair value – and unleash a 20% surge reminiscent of 2022.
A ‘Perfect Storm’ Brewing
Brooks describes the real as “horribly beaten down and undervalued.” He notes that despite its recent gains, the currency remains well below its equilibrium level. “In 2022, we never quite made it below my fair value of 4.50, but I think that’s now in play. I expect the coming months to see USD/BRL finally go below 4.50,” he wrote in a recent analysis.
The comparison to 2022 is instructive. When Russia invaded Ukraine, the Brent crude benchmark soared 40%, and the real surged 20% as Brazil, a major commodity exporter, benefited from higher energy and agricultural prices. Brooks sees a similar dynamic unfolding today, driven by two key geopolitical catalysts.
Two Catalysts: End of Middle East Conflict and Hormuz Strait Uncertainty
The first driver is the U.S.’s stated willingness to wind down its military engagement in Iran. A de-escalation of hostilities would reduce geopolitical risk premiums and boost carry currencies like the real, which offer attractive interest rate differentials. Investors would rotate back into high-yielding emerging market assets, pushing the real higher.
The second driver is the ongoing uncertainty over navigation through the Strait of Hormuz. With Iran threatening to disrupt oil tanker traffic, shipping costs and insurance premiums have spiked, benefiting alternative energy exporters like Brazil. As a net exporter of crude oil, iron ore, soybeans, and other commodities, Brazil stands to gain from higher global prices, further strengthening its currency.
Brooks draws a direct parallel to the 2022 experience: “Two main elements will propel the Brazilian real higher. The first is the U.S.’s willingness to end the current war in Iran as soon as possible, which will lift carry currencies. The second is the uncertainty around the navigability of the Strait of Hormuz. This benefits Brazil, a commodity and oil exporter, propping up the real’s value.”
Election Risk Looms
Despite the bullish outlook, Brooks acknowledges domestic political uncertainty. Brazil’s upcoming presidential election pits incumbent Luiz Inácio Lula da Silva against Flávio Bolsonaro, the son of former President Jair Bolsonaro. The race is a toss-up, and the outcome could significantly impact fiscal policy, central bank independence, and market-friendly reforms.
While Brooks did not speculate on election scenarios, he noted that political noise could create short-term volatility for the real. Investors should monitor the campaign closely, as a shift in policy direction might alter the currency’s trajectory.
Outlook
If the geopolitical backdrop evolves as Brooks expects, the stage is set for a significant breakout in the Brazilian real. A move below 4.50 per dollar would represent a major milestone and could trigger further bullish momentum. The 20% rally scenario is not just plausible but increasingly probable, should the Middle East conflict wind down and commodity prices remain elevated.
However, with elections looming, traders should remain hedged against sudden policy shocks. The real’s path to 4.50 is promising, but not without risk.