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The Dollar Dominance💲

The markets lost their short winning streak last week, falling by 1%. The primary reason was yet-another-record on inflation in the US, which came in at 9.1%. What this essentially signals is that the Fed may get more aggressive on rate hikes. Instead of the 75 bp increase in rates, it may now be at 100 bp (or 1 pp). Naturally, the markets had to fall.

Last week the Euro was equal to the USD, and briefly less than the USD. For two decades, or almost its entire existence, EUR has been stronger than USD. But this year, the former has lost value, and the USD has appreciated.


In fact, the USD has gained against most top currencies, and that’s affecting how money moves around the world, and how markets globally perform.


Why?

  1. Higher interest: Investors are ditching EUR, and most other countries as interest rate in the US rises higher and faster. This has been driving dollar strength. Higher interest simply means the USD becomes more expensive to borrow.

  2. Higher confidence: The USD has a reputation for being stable, and has been the world’s reserve currency for decades now. A better interest rate in the world’s largest economy gives investors better risk-reward compared to other economies where interest rates may rise, but the chances of default on debt are also high. This moves money from other countries into the US.

With this happening, most of the world (and India) face the same set of issues. It becomes pricier for the world to import products from the US, and less lucrative for the world to export their products.

The Rupee at 80 to the dollar, the Euro at parity with the dollar - similar issues around trade imbalances, current account deficits, and all that. But lucky India, instead of cutting down on cheap Russian oil, we’re buying more!

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