The Brazilian currency Real lost 1% at the end of trading on Friday and begins this week at 3.42 Reais to the US dollar, the lowest in twelve years, because of the political and economic uncertainties surrounding Latin America’s largest economy.

On Friday the US dollar broke the 3,40 Reais barrier for the first time since 20 March 2003. In the week ended last Friday the greenback climbed 2.3% against the Brazilian currency and in the month of July 10.2%.

The strong reaction in the money exchange market followed the announcement by the administration of President Dilma Rousseff that the original budget primary surplus of 1.2% was to be lowered to 0.15%.

At mid last week the Brazilian central bank raised the Selic reference interest rate for the sixth time running to 14.25%, arguing battling inflation was the major challenge.

The catch-all coalition that supports Rousseff is reluctant to support the drastic measures needed to straighten the budget and bring the economy back on its rails, fearing the deepening recession could be too damaging politically.

Meanwhile the Bovespa index, from the main stock exchange in Sao Paulo ended the week at 50.658 points a seven day advance of 2.87%, but overall during July the market lost 4.7%.

The vulnerable situation of Brazil, not only financial, but even more important politically, is already having an impact on its main Mercosur partners and the rest of the continent as it is the largest economy in Latin American.

The situation is particularly stressing for Argentina which has become heavily dependent on Brazil for its manufactured exports, and for Uruguay and Paraguay, whose main trade partner is precisely Brazil.