The rupee slumped to an all-time low against the US dollar on Monday as a higher-than-expected inflation reading in the world’s largest economy stoked speculation of aggressive rate hikes by the Federal Reserve, leading to global strength in the greenback.
Forex traders said weak Asian currencies, a lacklustre trend in domestic equities and persistent foreign capital outflows weighed on investor sentiments.
At the interbank foreign exchange, the rupee opened at 78.20 against the American dollar, then lost ground to quote at 78.29 -- its record low level, registering a fall of 36 paise from the last close.
On Friday, the rupee tumbled 19 paise to close at a fresh lifetime low of 77.93 against the US dollar.
"Weak global sentiments and weak Asian and European currencies have allowed the rupee to open below 78 after RBI ensured it did not cross 77.70. Have to watch the RBI as to how it behaves in the next few days," said Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors.
Global oil benchmark Brent crude futures fell 1.46 per cent to USD 120.23 per barrel.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.30 per cent higher at 104.45.
On the domestic equity market front, the 30-share Sensex was trading 1,461.54 points or 2.69 per cent lower at 52,841.90, while the broader NSE Nifty tanked 418.95 points or 2.59 per cent to 15,782.85.
Foreign institutional investors were net sellers in the capital market on Friday as they offloaded shares worth Rs 3,973.95 crore, as per stock exchange data.
State of play
The dollar continues to trade higher against the major currencies in what is now a 12-month rally. The dollar has appreciated by 11% against the euro since April 2021 and 12% versus the Japanese yen in just the past six weeks.
This most recent burst of dollar strength is most likely because of expectations of a more aggressive U.S. monetary policy relative to the eurozone and Japan.
The forward markets anticipate the Federal Reserve will accelerate its interest-rate normalization program with 10 additional rate hikes that will push the federal funds rate to 2.8% by year end.
In contrast, expectations are for the European Central Bank to be slower off the mark with rate hikes, pushing the policy only 25 basis points above zero by the end of the year.
Why the Dollar is so strong right now
The dollar is strong for three reasons. First, the Fed took two actions—it ended its expansive monetary policy (adding to the money supply) as the economy continued to improve following the Great Recession. That move constrained the supply of the dollar, which had the effect of increasing its value.
Second, the Fed also raised interest rates in December 2015, which strengthened the value of the dollar further. A rise in interest rates has the effect of lowering bond yields, which reduces investor interest in U.S. Treasury notes in the short-term. This increased the demand for dollars and let savers earn a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.
(with inputs from PTI)
