Dollar decline: A flash in the pan or start of a fall?

MUMBAI: If January was dominated by the global stock market rout, February’s big topic of discussion is likely to be the beginning of the end of the dollar rally.

The greenback posted its biggest two-day decline since March last year as a stuttering growth in the US raised the possibility of fewer-than-expected Federal Reserve rate increases this year.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 global peers, fell 0.5% to 1,221.78 as of 7:13 am in New York, adding to Wednesday’s 1.7% drop.

It’s now below its level at the end of 2015, the agency reported on Thursday. The dollar slipped 0.2% to 117.67 yen after erasing all its gains since the BoJ’s surprise January 29 move. The greenback weakened 0.7% to $1.1179 per euro and has now fallen every day this week. The Indian rupee rose to a four-month intraday high before ending 0.74% up at Rs 67.57 per dollar.

The dollar’s sudden weakness and uncertainty about growth in the US economy could improve prospects for the rupee, which has weakened 9.40% since the beginning of 2015 tracking global dollar strength. Overseas fund outflows may reverse or at least slow down if the greenback continues to fall against the major global currencies, traders said.

“The dealing room mood has suddenly changed with diminishing hopes of US rate hikes,” said Keta Kurkute, AVP — forex advisory, Mecklai Financial. “With the dollar weakening globally, investors would now reconsider their investment bets in emerging markets like India. “Investors, who went long (buy) on dollar-rupee pairs are now seen liquidating their positions,” she said.

The greenback ruled the market for much of 2015 as the prospect of higher growth and higher interest rates in the US increased demand for the dollar and felled currencies of both the developed and developing world.

China’s sharp slowdown and the yuan’s tantrums since August 2015 caused another major erosion in value of emerging market currencies. Commodities, already reeling under supply glut caused by China’s pullback, were weakened further by the dollar’s strength. It is not clear whether the dollar’s weakness is temporary or the beginning of a long-term trend.

A reversal of the developments in 2015 could give strength to commodities and emerging market currencies and revive fund flows to countries such as India. In January, foreign portfolio investors net sold Rs 8,814 crore of domestic securities, NSDL data show. In February so far, they have net invested Rs 2,327 crore