By Luana Maria Benedito and Jose de Castro
SAO PAULO (Reuters) - The Brazilian real has returned to the list of worst currencies among its peers with two sessions of heavy losses, suffering a blow from the rallying dollar after benefiting from a crowded carry trade, with increased tensions in Brasilia giving traders a reason to get out.
On Monday, the real fell 1.44%, after a 3.91% tumble on Friday, when its depreciation jumped to the highest levels since the world plunged into the coronavirus pandemic two years ago.
The U.S. dollar's rally has been globally buoyed by risks of a stronger monetary tightening by the Federal Reserve, but domestic issues have amplified the impact on the Brazilian currency following its impressive gains since the year began.
Last Thursday, President Jair Bolsonaro announced he would pardon an allied federal congressman whom the Supreme Court had sentenced to nearly nine years in prison, raising tensions between the nation's executive and judiciary during an election year.
Concerns about increased expenditures as Bolsonaro seeks reelection are also weighing on prospects while investors try to map fiscal risks by whoever takes office in 2023.
Andre Perfeito, chief economist at Necton Investimentos, also mentioned the recent tension between Supreme Court minister Luis Roberto Barroso and the Armed Forces over the fairness of electronic voting machines.
"This issue creates a climate of strong instability for the October presidential election, and this is central to many international investors who see democratic stability as a key point for long-term investments," he said.
The real fell 2.90% to 4.95 per dollar at its low of the day but reduced losses to 4.8768 reais. It suffered its biggest 2-day drop since May 2017, when corruption scandals melted Brazilian markets.
The movement has boosted analysts' bets that the currency will once again approach 5 reais to the dollar due to global liquidity restrictions and political uncertainties in Brazil.
"The trade was heavily loaded in reais, we had weeks, months of currency inflows. But when it's time to leave the door is always small, it's always like this," said Marcos Weigt, head of treasury at Travelex Bank, who expects the dollar to easily reach 5 reais if the sell-off continues.