Rupee’s catastrophic collapse will be made worse by rampant dollar
The rupee is on a tough road ahead, with the next key psychological level of 80 per dollar almost a done deal after a sharp drop in US inflation, which should boost the dollar. la is already more widespread.
“Asia’s forex is vulnerable to a sell-off after the US inflation surprise,” said Robert Carnell, Head of Research for Asia-Pacific at ING.
Inflation data rose to more than 9.1% expected from a year ago, marking a 40-year high, that would crystallize expectations of a larger-scale interest rate hike by the Federal Reserve. state this month and in turn, reinforce recession risks.
The rupee’s journey this year has been nothing short of dramatic, as the coin plummeted from changing hands at 74 in early 2022 to almost 80 against the greenback.
The coin has fallen to new record lows 26 times since Russia invaded Ukraine in late February, including five times it breached new weak levels this month, based on Nasdaq data.
That also includes the new all-time weakest close ever at 20 days.
Just two days ago, 80 per dollar was still a leap, skip and jump, but now it’s almost a done deal, given the rate at which the coin has fallen recently.
So far this month, the rupee has hit a new lifetime low five times.
Indeed, after hitting a series of all-time lows, the rupee closed Wednesday at another record weakness of 79.81 against the greenback, marking a lifetime low in the session. third in a row and only 80 a dollar away. sign.
The rupee’s collapse began days after Russia invaded Ukraine when it first hit 77 per dollar in March and has since plummeted to new lows that breached several political sentiment thresholds. like every other day.
This year’s sell-off in global financial markets has been largely influenced by concerns that an increase in exchange rates will limit global economic development. In contrast, the safe-haven dollar benefited the most in the currency markets.
Much of that was driven by capital outflows from assets valued in most other currencies and into the safe-haven greenback, evident from the rise in the dollar index. la, which tracks the currency against a basket of six, to its highest level in nearly two decades.
The real fear now is that once the rupee breaks above $80, the drop could be even steeper, as a major psychological rate break raises bets in favor of freefall, as noted. witnessed since the rupee weakened beyond the rate of 77 per dollar.
Going from 77 against the dollar to 78 and then 79 was swift in foreign exchange terms, with the coin collapsing rapidly towards 80 per greenback.
It was something no one expected, even in their sillier predictions at the beginning of 2022, when the Indian currency traded around 74 against the greenback.
It should be noted that limitations and risks to monetary stability remain high, which is paramount when combating rising inflation and higher commodity prices; The outlook looks bleak.
Add to that the fear of a global recession fueled by anti-inflationary central banks.
“The rupee is expected to trade above a negative sign due to the strong US dollar. BNP Paribas,” said Anuj Choudhary, Research Analyst at Sharekhan.
The rupee has been battered by a widening trade and current account deficit, and boosted by a global downturn into a safe-haven US dollar due to increased global recession risks.
Rising commodity prices have not helped the Indian currency, especially crude oil, as the country imports more than 80% of its needs, and the war on the edge of Europe is unlikely to abate any time soon; if anything seems to be escalating further.
Not only emerging market currencies, but the trend against the dollar has been based on a wide range; almost every other currency has fallen to multi-year lows, underscoring growing fears of a global recession.
Reuters graphic: Euro pulled in parity
On Wednesday, the euro broke its parity with the dollar for the first time in 20 years as an expected interest rate differential with the US led to that collapse.
Bloomberg reports that the euro slipped as much as 0.4 percent to hit a low of $0.9998, the first time below $1 in more than two decades, suffering a rapid and brutal decline this year.
With Europe the epicenter of the fallout from the Russo-Ukrainian war, the risks to the economies there have grown and cuts to Russian gas supplies have raised fears of a potential war. recession in the euro area.
Add to that that central banks move at very different speeds and the dollar follows demand, and some analysts say parity may not be the end point but merely a step. buffer to continue to weaken.
The euro’s decline this year is just one side of the global story of dollar dominance.
Societe Generale’s Kit Juckes told Reuters the market has held a bit in terms of euro-dollar parity but we still have an incredible amount. The Fed will continue with rate hikes.
This year, the greenback has been favored as an investment haven, supported by higher US interest rates and a safe bet against a global recession.
As for the rupee, the Reserve Bank of India and the government intervened but were unable to stem the steep fall.
The government has levied import taxes on gold to help the rupee depreciate. The RBI has intervened in the spot and futures forex markets by selling dollars, introducing measures to promote direct foreign exchange capital flows and announcing a rupee settlement system for international trade payments. economic.
However, the RBI has repeatedly said it will intervene only to control the rupee’s “jerky movement” and not try to counter the broad global trend, which is the case for now.
While there is speculation that the dollar’s rally may prompt global policymakers to intervene to weaken it at some point, there are only so many central banks or Its policy is controllable in the monetary environment.
The fate of the rupee, and almost every other currency, is in the hands of the Fed and the dollar.
