The dollar index entered into a phase of recovery towards the end of July 2018 after it got supported above 94 levels. Most of the influential US Fed speakers including the new Fed chief have been indicating a continued rate tightening cycle backed by favourable inflation and employment data. The ongoing US-China tit-for-tat trade spat was also helping the dollar gain against other majors, while the brunt of all this was felt by not only China but also the entire emerging markets pack. As a result, the dollar index moved to touch a high of 96.98 on August 17, 2018.

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The story for emerging markets was much more pronounced against the dollar. There were two basic factors that moved emerging markets towards the second part of August 2018. One, the ‘risk off’ and two, escalation of Turkey situation. In the middle of August, Turkish Lira lost more than 20% against the dollar in two days flat when the US imposed special tariffs against Turkish imports into the US. Turkey’s gross external debt stock stood at $466.67 Billion which amounts to a staggering 52.9% of it’s GDP, as at the end of March 2018. With a rising US interest rate scenario, it will become increasingly difficult to service such a huge debt stock.

While Turkish Lira bore the biggest brunt, other emerging market currencies also suffered due to contagion effect. After the Turkey crisis, the focus is again back on China as a trade war and new tariffs come into effect. The protracted trade war with the US and mounting domestic debt pile is fueling investor anxiety. The jury is still divided on the future prospects of a full-blown crisis of sorts in China. In my estimation, China is on a much better wicket than in the past to pass any sort of storm brewing in the background.

All the above and a global oil price rally has not augured well for India, in the second half of August 2018. The Indian rupee lost almost 2.38% in three trading sessions (on the wake of the Turkey crisis) to touch a life low of 70.4000 against the dollar. A depreciating rupee and high global crude prices is a combination that Indian economists fear the most. The combination will add to inflation worries which had already started making its presence felt, in the last few data releases.

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Having said all this, it’s fair on my part to bring to notice that, on the external as well as internal dynamics, India stands way apart from emerging economies like Turkey. Hence, global investors would be doing themselves a service by looking at macroeconomic differentiators rather than put all the countries under the same EM pack.

While the rupee had touched a low of 70.40 earlier, it had recuperated from there. The dollar index which had earlier moved around 96 has now shed some of its weight. Secondly, global investors are now cutting some of the ‘long’ dollar EM positions which have helped rupee recover from historic lows. Going forward, we might see rupee remaining under pressure but that doesn’t mean that it will keep depreciating. In fact, I am looking forward to a little stabler dollar-rupee in the coming days. I am looking forward to a 69.50-70.50 range in the coming days/weeks.

By, Bhaskar Pandaa
The writer is senior regional head, Treasury Advisory Group, HDFC Bank

Source: DNA Money