The Dollar’s strength and Feds dilemma By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 31, 2015 | Posted by bobbysrinivasan << back to blog

The US dollar index which measures the US currency value against a basket of its major peers has reached a high of 99.649. This is a 12 year high and given the current strength in the US economy this index may reach 110 in the next one year 1 time.

In the meanwhile, the euro currency which was as high as 1.39 US dollar to it is now currently trading around 1.09, a steep fall in value of over 30 percent in the last couple of months. Mario Draghi, the European central bank president is overjoyed by this and said that it is pointing in the right direction. James Bullard President of the St. Louis Fed said and I quote, “We are going to let the exchange rate go where it needs to go to equilibrate international markets”.

It is not an easy task for the US Federal Reserve. The open market committee is meeting this week to determine the future course of the US interest rates. Chris Williamson, Chief economist of market has predicted that the euro currency will become equal to the US dollar. Given the euro’s depreciation, the ECB is now expecting an economic growth of 1.5 percent this year revising the earlier expectation of 1 percent.

What does it all mean to the US corporates who are doing business overseas

The overseas revenue from US exports will yield less because of the appreciating US dollar.
The US exports itself will go down significantly as it will be expensive for overseas importers.
The imported inflation will tend to fall.
All the US competitors are competing to allow their currencies go down in value to maintain their market share.

The question before the Fed is “Should they increase the discount rate in the forthcoming meeting or wait till June 2015 before they increase it”

The US economy seems to be recovering rapidly. The non-farm payroll is beating all expectations in the last 60 months. The number of new jobs created has reached 12 million averaging 2,00,000 jobs every month.

The Indian macro-economic policy will be greatly affected by the Feds policy. The money will flow out of India making the Indian rupee weaker against the dollar. Only recently RBI has lowered the repo rate by 50 basis points. The Indian government is committed to achieving a higher economic growth. Therefore we can expect that the Indian rupee value will go down against the dollar possibly towards Rs.70 especially when the Indian stock market is expected to go lower.

Just as in Eurozone, the important thing for India to increase the economic growth rate at any cost including the fall in the value of rupee.

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