US Dollar rally and its impact on currencies worldwide – Investing Abroad News

Stock market investors are keeping a close watch on the US dollar and its rise against other currencies. A rising interest rate scenario in the US means global investors want to hold their money in dollars after selling their offshore assets. And, this is what is US dollar thriving on – a rising interest rate environment.

The value of the U.S. dollar in relation to a basket of international currencies is gauged by the U.S. dollar index (USDX). The dollar index is one of many leading indicators that stock market analysts, strategists, and investors continue to regularly monitor. The fundamental reason why a higher dollar bull market has been bad for stocks is that it affects multinational firms’ profitability. A stronger dollar for the US forms lowers the price of imports while raising the cost and reducing the competitiveness of exports on international markets.

Also Read: What is Dollar Index and how it impacts the stock market – Explained

Emkay Wealth Management, the wealth management and advisory arm of Emkay Global Financial Services has released a note on the rally in the USD and its impact on currencies worldwide.

The US Fed has been increasing interest rates at a record pace to control inflation. The inflation rate in the US has shot up to 8%, a figure that was last seen four decades back. The Fed has hiked rates by 300 bps this year and is likely to hike further in its meeting next month. This has brought the focus to the US Dollar. The rate hike has led to an appreciation of the greenback.

The US Dollar continues to dominate the currency markets and it shot up to decadal-high levels. The Dollar Index moved up from 108.60 to 114.50 levels in a short span of just two days. The hike in the US official rates and the assertion of the Fed that the tool of rate hikes will be used consistently till the inflation is brought down to acceptable levels.

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This reaffirmation of the stance resulted in dollar buying across the major currency counters. The worst affected by the dollar’s bullishness were the Euro, Japanese Yen, and the Yuan, and thereafter the Pound Sterling. The advance made by the Dollar against the Yen and Euro pushed both currencies to historically low levels.

However, in the light of tighter monetary policy being pursued by other major central banks, the appreciation of the Dollar may happen at a slower pace compared to what it has been so far. The emerging market currencies too have depreciated and witnessed outflows due to the selling of assets by overseas investors.

Due to widespread currency losses and the ineffectiveness of central bank intervention, there is a prominent view that there is a need for concerted intervention by central banks which could be more effective. This stems from the fact that there is a realization of the need for currency stability.