US Dollar: Uncertainty prevails

• HDFC securities
• 07 Jun 2018
• Knowledge Centre

The movement of the US Dollar this year has given out conflicting signals till date this year.

 

The currency witnessed its best monthly performance since the presidential election in November 2016 in April this year. This move was supported by hopes that the Federal Reserve meet will continue to raise interest rates. It caused the US Dollar Index (USDX- a measure of the currency against half a dozen major currencies) to reach its highest level at 92.45 on 13th May 2018.

 

The Federal Reserve’s policy update resulted in a pause, as the USDXswung between negative and positive territory, finally resulting in a fall of 0.11% to 92.41 on 16th May 2018 owing to profit booking.

 

The currency witnessed a negative phase owing to US President Donald Trump’s stance onthe imposition of tariffs on Chinese goods. It later regained its losses to touch 93.90 on 22nd May 2018.On the whole, the USDX has tumbled 11.3% since he took over as President in January 2017, according to a website providing financial data and analytics.

 

Scenario vis-a-vis India

 

The Indian Rupee recovered from a nearly 18-month low by gaining 12 paise to 68 against the US Dollar at the forex market on 15th May 20 on fresh selling of the US currency by exporters and banks. This movement of the US Dollar v/s the Indian Rupee was triggered by the fact that the US central bank will not be too aggressive in the raising of interest rates, post the release of the US Fed minutes. The minutes showed that a majority of policymakers backed an eventual interest rate hike in line with market expectations. On the other hand, the possibility that they would take immediate action on that front seemed slim. The minutes stated that the Fed would tolerate inflation rising above a certain limit for a certain amount of time.

 

Ambiguous stance

 

Given these parameters, the US Dollar’s performance in the coming months is uncertain. Of course, the broader view is that the currency is one of the most stable across the globe, and its importance cannot be understated. According to Investopedia, besides the United States, there are five US territories and seven sovereign countries that use the US Dollar as their official currency.

 

There are plenty of countries that regularly use the US Dollar with their own local currency. These include the Bahamas, Barbados, St. Kitts and Nevis, Belize, Costa Rica, Nicaragua, Panama, Myanmar, Cambodia, and Liberia, as well as several Caribbean territories.

 

The non-US countries whose official currency is the US Dollar are:

 

• Ecuador, 
• El Salvador, 
• Zimbabwe, 
• Timor-Leste, 
• Micronesia, 
• Palau, and 
• the Marshall Islands.

 

Currently, central banks’ US Dollar share of allocated foreign-exchange reserves (FX reserves) stands at a four-year low. This reveals a shift in sentiment, and also a probable loss of faithin the currency.

 

With so many triggers coming together – both domestic and overseas – it seems difficult to pin down the US Dollar’s forecast for 2018.