The Dollar climbed to a four-year high against a basket of currencies and hit a two-year high against the Euro on Tuesday after Eurozone inflation fell in September, putting the greenback on track for its biggest quarterly gain in six years. The Dollar Index, which measures the currency against a basket of six major currencies, has gained 7.7% over the last three months, the biggest quarterly gain since 2008 and a record-setting 11 straight weeks of gains. It was last up 0.4% at 85.91.
The Dollar has long been the world’s top business currency and is viewed as a “safe hedge” among investors. However, the recent run up is partly because the American economy is improving, especially relative to other parts of the world. This will compel the US Federal Reserve to raise interest rates, which is generally seen as a good thing for a country’s currency. At the same time, things are not looking too good in Europe. Therefore, the European Central Bank is starting to do some stimulating of its own. Those measures have resulted in a weaker Euro. Further, the Japanese Yen has struggled because of the country’s ongoing economic problems. The Dollar trend is likely to continue, with the currency already gaining more than 8% against the Euro in the past six months.
Key risks for the Dollar
Following are the two key risks for the Dollar this week:
- NFPs disappoint again, throwing into doubt some of the market’s expected Fed hawkishness
- The ECB fails to announce any new policy measures, which fuels a mini-rebound in the single currency.
For now, the fundamentals and the technical picture are in favour of a stronger USD. However, things could change in the next three days. Therefore, make sure you are watching your economic calendar and Draghi’s comments closely.
The Dollar Index continues to extend recent gains and the broader bullish pattern of higher highs and higher lows suggests that momentum is on the upside, and we could continue to push higher. The next level of resistance that we are focusing on is 86.98 of the July 2013 – May 2014 bear trade. As we wait for the key ECB meeting and NFP data, setbacks could be limited, with a low at 85.49 acting as interim support. If we get an external shock such as a less dovish ECB or weak payrolls number, we could see a sharper loss in the greenback, with the next level of key support at 85.05.
Rupee fell on Monday, posting its worst month since the record low levels of August 2013, as the dollar continued to strengthen against emerging market currencies over growing hedges for an early increase in the US interest rates. Rupee fell by around 2.1% in September, the most since a fall of 8.8% in August last year, when the currency was in the midst of the worst market turmoil since the balance of payment crisis of 1991.
Gains earlier in the year have stalled, with Rupee falling by around 2.64% in the July-September quarter, around growing worries that improving US economic data would allow the Federal Reserve to start raising interest rates. That has trumped the outlook for domestic interest rates, given that the Reserve Bank of India on Tuesday kept the repo rate unchanged and sent a strong signal that it will refrain from easing until it is confident that consumer inflation can be reduced to 6% by January 2016.
The partially convertible Rupee ended at 61.7450/61.7550 per dollar compared with Monday’s close of 61.53/54. Rupee hit an intra-day low of 61.83, a level last seen on March 5 after the Euro fell below 1.26 against the dollar.
With dollar trading strong against major currencies, local currency continued to weaken against dollar from a high of 60.20 for the month to 61.97 levels. USDINR spot tested interim resistance at 61.90. If it breaches this level and continues to hover above the same it can further test 62.73 (38.2% Fib level).
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