Rising dollex spells bad news for Nifty

 

Riken Mehta


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The US dollar index is trading at four-year high surpassing 85 levels on the upside on Thursday. The dollar index tracks greenback movement against six other major currencies. The current rally in dollar index is sparked by faster US economic growth pushing the US Federal Reserve closer to raise interest rates while the slowdown in Europe and Japan has forced central bankers to increase stimulus and boost liquidity.

As seen from the chart, the Nifty has negative correlation with the dollar index. Indian equity market banks heavily on foreign fund inflows and strength in US dollar index would accentuate selling in equities by FIIs.

The Indian rupee closed at 7-week low in trade on Thursday. FIIs have sold shares worth close to Rs 3000 crore in last three days. It would be premature to say that a deeper correction is underway but one should keep a close look at dollar index before starting bottom-fishing in the market.

Double whammy for India: Dollar Index at 3-year high, Crude at 3-month high

Riken Mehta

Don’t be surprised to see the Indian rupee hitting fresh all-time lows in days to come after the dollar index touched 3-year high on Friday. The latest US non-farm payroll data has exceeded beyond analyst’ expectations signifying that the job creation is happening and the US economy is coming back on growth trajectory. This has further fuelled the speculations of US Fed tapering off the quantitative easing program later this year. 

As seen from the chart, crude and dollar index have moved in the opposite directions. However, with impressive job data, crude has also rallied along with dollar index on expectations of demand for oil picking up in US. Back home, analysts have already predicted the rupee to touch 62-65 levels in this calendar year.  India being net importer of crude will be severely impacted from the current rally in crude and dollar. This will further deteriorate the current account deficit. Also, strength in US dollar will further support the US treasuries leading to more unwinding of positions by the FIIs from the bond market.