06:49 AM EDT, 07/10/2025 (MT Newswires) -- The major foreign exchange rates remained relatively stable overnight Wednesday following United States President Donald Trump's latest tariff announcements, said Mitsubishi UFG.

In contrast, the Brazilian real (BRL) has been hit much harder, falling by over 2% against the US dollar (USD), wrote the bank in a note to clients. It follows President Trump's threat to impose a 50% tariff on goods imported from Brazil beginning on Aug. 1.

The size of the tariff was much larger than expected, given that President Trump had previously planned to implement only a 10% universal tariff rate when the Liberation Day tariff announcement was made back in early April, pointed out MUFG.

In a post on Truth Social, President Trump said that "due in part to Brazil's insidious attacks on Free Elections, and the fundamental Free Speech rights of Americans...we will charge Brazil a 50% tariff" and described the trial of former President Jair Bolsonaro "a Witch Hunt that should end IMMEDIATELY." Trump also accused Brazil's Supreme Court of issuing "hundreds of SECRET and UNLAWFUL Censorship Orders". It represents a shift in approach from President Trump who had previously justified tariffs as a tool to address trade imbalances, representing a threat to national security concerns but now appears to be trying to interfere in domestic politics and legal matters, stated the bank.

The development will further heighten U.S. policy uncertainty, which was already unusually elevated and has been weighing on the US dollar during the H1 of this year. Brazil has previously gotten off relatively lightly when President Trump outlined plans for only a 10% tariff on imported goods from Brazil on Liberation Day, reflecting the fact that the U.S. runs a small trade surplus with Brazil, which totalled US$6.8 billion in 2024. The U.S. imported US$42.4 billion of goods from Brazil.

While the threat of a 50% tariff on Brazil was a surprise, there have been indications of President Trump's growing frustration over political developments in Brazil. The tariff threat puts Brazil in a difficult position as it isn't obvious what the country can do to appease Trump and avoid the 50% tariff without going as far as cancelling the trial of Bolsonaro, said MUFG. It has been reported that shortly after the announcement was made by President Trump, President Luiz Inacio Lula da Silva called top cabinet members into a meeting at the presidential palace. It was later followed by a post by President Lula on social media in which he stated that Brazil wouldn't be "tutored" by anyone while adding that the case against those who planned a coup is a matter solely for the country's justice system and "not subject to interference or threat."

Without a clear path yet to de-escalation, the real is likely to continue to trade on a softer footing in the near term, added MUFG. The initial real sell-off was exacerbated by the unwind of popular carry trades.

The real has strengthened sharply this year, boosted by the high yields on offer in Brazil, where the central bank has raised the policy rate up to 15.00% helping to lower USD/BRL from a high of 6.3156 at the end of last year to a recent low of 5.3721. The risk is that carry trades continue to be unwound on the back of heightened trade risks and higher financial market volatility, triggering a further reversal of BRL gains.