Over the last 12 months, the Brazilian Real has strengthened 32% against the USD, earning the distinction of strongest currency in the world. Analysts expect 2006 to be another strong year for the Real, as US interest rates peak, and investors shift funds to emerging markets in order to capture higher returns. Despite recent interest rate cuts totaling 3%, Brazil has not had difficulty attracting foreign capital. It recently auctioned off $1 Billion worth of Brazilian bonds, and is planning similar auctions in the near future, which should spur additional inflows of foreign capital. Bloomberg News reports:

“The contained inflation in the U.S. signals that flows will continue coming to Brazil. The most important thing nowadays for the currency markets is to pay attention to U.S. bonds to see how it will affect flows to emerging markets.”