FREE

MOSL: ECOSCOPE: Long US Dollar? Not so quick!; USD should weaken due to worsening in US’ twin deficit

ECOSCOPE: Long US Dollar? Not so quick!; USD should weaken due to worsening in US’ twin deficit

 

• Movements in the US Dollar (USD) index (trade-weighted against major currencies) are an important determinant for the Indian Rupee (INR) and other emerging market (EM) currencies. The recent weakness of ~5% in the INR vis-à-vis the USD also coincided with ~4% appreciation in the USD index. It is, therefore, imperative to incorporate the expected future direction of the USD in INR forecasts.
• In the absence of imminent US recession, as we had noted earlier, an expected deterioration in the US' twin deficit (sum of fiscal deficit (FD) and current account deficit (CAD)), and stable growth differential and convergent monetary policy between the US and non-US developed world are likely to weaken the USD over the next couple of years.
• The USD, however, will rally if the non-US developed economies - read Eurozone (EZ), Japan, or the United Kingdom (UK) - witness significant growth weakening. The wider growth differential, along with divergent monetary policy, will then initiate long USD trades, which doesn't bode well for EM currencies, including the INR.