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Costlier Dollar & The Central banks’ Dilemma

Author: Siddhesh Ghare/Thursday, May 3, 2018/Categories: Currency

Costlier Dollar & The Central banks’ Dilemma

With the central banks across the globe witnessing a sudden spurt in action, the Indian forex scene is facing turbulent times.

The divergence in the policies of major central banks across the world has impacted price trends recently that may not neutralise soon. The Federal Reserve approach towards interest rates and the recent supportive economic conditions in the US give reasons to believe that the dollar is gaining some strength.

The Dollar Index in the last couple of months has tried to hold itself above the 88 mark which it had moved above way back in the beginning of 2015.

Adding to the strength of the Dollar is the European Central Bank, which is in a dilemma whether to follow the Federal Reserve’s path on rate hikes or hold back for a much longer period following the recent economic data released in the Euro zone.

Fed officials have been hawkish on the interest rate policy & economic growth in the US and all these pro-dollar strength factors would hurt other currencies much deeper and for a much longer time.

Domestically, the rupee has been hit by high crude oil prices, leading to widening of the current account deficit gap, FPI outflows and rise in dollar demand from importers.

The outlook on Dollar, therefore, remains bullish with minor corrections in the counter against the Rupee.

The author is the head of FX Risk Solutions, Karvy Forex & Currencies Pvt Ltd.

 

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