Brazil's currency seen trading in tight range ahead of election - Reuters poll

© Reuters. FILE PHOTO: Brazilian Real and U.S. dollar notes are pictured at a currency exchange office in Rio de Janeiro, Brazil, in this September 10, 2015 photo illustration. REUTERS/Ricardo Moraes

By Valentine Hilaire

MEXICO CITY (Reuters) - Brazil's currency is forecast to hover in a tight range in dollar-dominated trading this month as Brazilians prepare to vote in the Oct. 2 presidential election, a Reuters poll showed on Wednesday.

The dollar index reached a two-decade high on Tuesday and is expected to remain strong on expectations of continued hikes in U.S. interest rates and the outperformance of the American economy relative to its peers. [EUR/POLL]

In the coming weeks, the real is expected to be rangebound and trade just 0.15% higher at 5.24 per U.S. dollar, according to the poll. But it was set to slip into negative territory and lose 0.8% in three months, according to the poll.

"We do not anticipate big swings in the short term since we believe it is going to be a peaceful election. We do not see any risks of institutional crisis or violence, as happened in the United States when Biden started his term," said Ronaldo Patah, chief investment officer at UBS Wealth Management Brazil.

Former Brazilian President Luiz Inacio Lula da Silva, a leftist, is seen winning 44% in a first-round vote against incumbent far-right President Jair Bolsonaro's 34%, a Genial/Quaest poll published on Wednesday showed.

Almost all emerging markets currencies were expected to weaken or at best stay at their current levels in the next three months, as the U.S. central bank's monetary policy tightening enhances the dollar's position as a safe-haven asset. [EMRG/POLL]

But a relatively stable outlook for the Brazilian currency could change after January 2023, when the winner of the presidential election is due to present a new fiscal framework for the country, Patah added.

In one year, the real was forecast to trade 0.9% higher at 5.20 per U.S. dollar, according to the median estimate of 28 foreign-exchange strategists who were polled Sept. 1-6.

Reflecting nervousness over the real's future path, seven of 14 respondents who answered a separate question on the currency's risks said they were tilted to expect further weakness. Five saw upside risks and two considered them balanced.

"Brazil's central bank seems done with monetary tightening, so further Fed fund rate hikes will reduce faster the gap and in the short run may start to affect foreign currency inflows," noted Mauricio Nakahodo, senior economist at MUFG.

Analysts expect further Fed rate hikes and see the U.S. central bank's benchmark overnight interest rate to be in the 3.25%-3.50% range by the end of this year, one percentage point higher than the current rate. [ECILT/US]

Mexico's peso was expected to drop 3.9% to 20.85 per U.S. dollar in one year, despite analysts persistently raising inflation forecasts and reinforcing bets that policymakers would keep raising the central bank's key policy rate.

The peso has gained more than 2% against the dollar this year, while the real is up more than 6% against the greenback.

(For other stories from the September Reuters foreign exchange poll:)