The rising US dollar complicates the outlook for markets and economies
It’s not just the crude oil prices that are rising, but so is the US dollar and this scenario is spurring a balance-of-payments crisis in many oil-importing nations. In the Indian context, the country’s fast dwindling foreign exchange reserves and expensive imports due to a rising dollar are certainly cause for alarm. In context:
- The dollar’s foreign currency value has been increasing. The dollar has climbed by approximately 9% since its low point a year ago, according to the Federal Reserve’s nominal broad dollar index, but other indexes have seen higher gains.
- The strengthening of the dollar will have an impact on multinationals’ foreign-based sales and earnings.
- The impact of the dollar’s rise will be felt well beyond the United States’ boundaries. These repercussions will be felt in countries that are already dealing with rising food and energy prices, as well as the effects of a slowing Chinese economy.
Conventionally, a rising dollar has meant lower commodities prices and vice versa. This dollar-commodity link has often served as a global economical cushion. However, this equation has gone for a toss in current times (which we will delve into). Let’s take a closer look at what the dollar value appreciation means for global investment trends.
Investors favouring defensive stocks
According to a Morgan Stanley report, in today’s market, the conventional investing playbook for a strong US dollar may not work as effectively. Commodities, for example, normally move in the opposite direction of the dollar, so prices should fall in theory, as mentioned earlier. However, this isn’t the case; instead, due to the combined supply shocks generated by COVID-19 and Russia’s invasion of Ukraine, commodities-based inflation remains strong. A high dollar is also bad news for emerging markets that rely on dollar-denominated debt because it makes servicing the loan more difficult. Many emerging-market countries, on the other hand, are in fantastic fiscal position today, with ample foreign-exchange reserves. In fact, those that contribute gasoline, fertiliser, food, and metals, such as much of Latin America, stand to benefit from the global supply crunch.
Could hurt US Exports
News reports highlight that the rising US dollar does not truly bode well for US companies. In the short run, a higher dollar may boost companies’ and consumers’ purchasing power when it comes to imports, easing inflationary pressures. The dollar’s rise, on the other hand, might hinder US exports and the translation of international profits by US corporations, providing growth challenges. Already, the rise of the US dollar has meant that many US companies, from dating apps to detergent makers that depend on international profits, are seeing significant losses.
Goldman Sachs’ index of US companies with mostly overseas exposure has dropped about twice as much as its index of companies with largely local operations this year, down roughly 15% and 7%, respectively. Last year, the internationally exposed index increased by around 27%, compared to 30% for the domestically focused index. The overseas index outperformed the domestic index in 2020 and 2019.
In essence, continued dollar strength could create complications in the outlook for markets and economies. Presently, investors may not fully be able to assess its impact.
Ostensibly, the growing trade deficit in the United States will be exacerbated by a rising currency. Although American customers are losing confidence as a result of inflation, they continue to buy foreign items. Lower import prices will aid the Fed in combating inflation, potentially delaying future interest rate hikes.
Where does India stand?
India finds itself in a quandary as the rupee has fallen to an all time low against the US dollar thereby bearing a direct impact on the cost of living. While inflation increases, India’s reliance on fertiliser imports and fertiliser subsidies are poised to reach new highs. The margin would also rise for gems and jewellery, petroleum products, organic chemicals, and autos and machinery, which are the country’s main export categories with considerable import content. However, as imports become costlier worldwide, a recession could be induced unless the situation improves. India’s foreign exchange reserves are already precariously hovering around the USD 600 billion mark.