Rupee headed for more pain as USD likely to end with huge gain this month

It appears the dollar will end a fourth straight month in huge gains, all thanks to the US Federal Reserve. In fact, the greenback has remained buoyant throughout 2022 with the exception of May. Nothing has changed in one trend.

The US dollar soared to a fresh 24-year high against the yen after the BoJ (Bank of Japan) held on to ultra-loose stimulus on Thursday, just hours after the Fed surprised markets with dovish interest rate forecasts. Both Fed forecasts and Russia headlines contributed to the dollar’s strength, which was particularly pronounced against the euro and other European currencies.

The Fed released new forecasts showing rates to peak at 4.6% next year, with no cuts until 2024. It increased its target rate range by another 75 basis points overnight to between 3.00% and 3.25% , as was generally expected.

Immediately after the BOJ’s decision to keep short-term interest rates negative and keep the 10-year Treasury yield near zero, the yen experienced a wild ride, fueling market expectations that the Bank of Japan will continue to swim against a global currency flood monetary tightening, despite a weaker currency. The market will be nervous, there will be some volatility for a while, but eventually the weak yen trend will continue in the medium term.

The 1998 high was 147.60 so the market will be looking at that level. Japan’s top currency diplomat later said officials did not intervene in the market.

The dollar index, which measures the dollar against a basket of six counterparts including the yen, euro and sterling, had previously risen to 111.79 for the first time since mid-2002.

The dollar has already been supported by safe-haven demand after Putin announced he would call up reservists to fight in Ukraine and said Moscow will respond with the might of its entire arsenal if the West continues what it says ” nuclear blackmail” called the conflict there.

The market currently sees an 80% chance of a 75 basis point rate hike by the BOE and a likely 20% chance of a half point hike.

Going forward, the Dollar Index has formed a strong base near 110 on the charts and if this level is held with some volume support, there could be another leg of a rally to 113. In this scenario, USDINR pair has full potential to surge above 81 amid escalating geopolitical risk between Russia and Ukraine. To add to the pain, if energy costs rise, the rupee could slide further.

(The author is
Senior Research Analyst for Commodities & Currencies, Securities) Rupee headed for more pain as USD likely to end with huge gain this month

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