The dollar exchange rate is one of the things always on our minds. I have linked up some stuff on this topic earlier here. Given the credit crisis, and a counter intuitive dollar rally has all of us wondering how long this would continue and where would the dollar settle down. Like many I too expected the dollar to peter down back to the early 40s and late 30s vs Rupee as the magnitude of the crisis started to become clear. Instead, dollar began to rally reaching record highs vis-a-vis Rupee this december, leaving many of us scratching our heads. Now we know the reason. For the uninitiated, it was basically because of damage control here in the US. As the credit crisis hit home here in the US, all the FIIs and others who had invested in India started pulling back to take care of the fiscal situation. Since all these payments are in dollars, there was a huge outflow of dollars from India, leading to a stronger dollar. This happened not just with respect to India, Dollar has been strengthening against most currencies.
Experts, however, feel that this dollar run might be petering out and is poised to weaken as US pumps in trillions of dollars into the system to come out of the current liquidity trap and loosen credit. From the article in Bloomberg
The biggest foreign-exchange strategists and investors say the best may be over for the dollar after a four-month, 24 percent rally.
The currency weakened 5.9 percent measured by the trade- weighted Dollar Index after strengthening between July and November as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit. Ever since peaking on Nov. 21, the dollar fell against all 16 of the most-widely traded currencies, according to data compiled by Bloomberg.
There are still skeptics to this reasoning who say that this dollar rally hasn't peaked yet and there is still juice left in the dollar. From the same article:
Dollar bulls say it’s a mistake to bet against the currency now because Treasury yields are falling to record lows even as the government prepares to sell more than $1 trillion of debt, a sign there’s no end in sight to demand for the safest U.S. assets. They also say the yen, which typically rallies as risky assets decline, is appreciating.
“The yen’s strength falls into our theory that the risk- aversion trade is not off the table,” said Peter Rosenstreich, chief market analyst at Geneva-based currency trading firm ACM Advanced Currency Markets. “The fact that the yen continues to gain strength validates our theory in the longer term, the dollar safe-haven trade is not done yet.”
Meanwhile closer home Rupee is moving upward against Dollar keeping up with the global trend. From Economic Times
The rupee closed at 48.05 against dollar, off its high of 47.92. This is its strongest since November 11, and gaining 0.8% from its previous close. Dealers said that the activity was very erratic on Monday, with a lot of banks covering their short dollar positions and there was also some oil buying.
So, would this trend be a long lasting one or a glitch? Should we hold our savings here as dollars or send it back home immediately to cash in on the current rate? No one can give a definitive answer. There are too many variables at play here. However, one thing is for sure, given all the excesses in the wall street and the amount of money being thrown at this problem, dollar has to go down. It might not happen when we think it will, but it has to. Just like the credit crisis, many economists predicted the real estate to burst by 2006, yet it took two more years, but it did burst. I would bet my money on shorting the dollar and sending as much as possible back home and that is what i am doing ;).
Update:
Economic Times seems to agree with the conclusion that the days of a strong dollar is perhaps over and that rupee would settle at 45 against a dollar. From Economic Times:
NEW DELHI: The rupee is climbing back to positions of strength previously held and may soon breach the Rs 45-per dollar barrier, say analysts. The surge is attributed to rising capital inflows, narrowing trade deficits and the weakening of dollar against major currencies.
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Overseas funds were net buyers of Indian stocks in the five days to December 12, the longest stretch in almost eight months. “With inflows strengthening, the pressure on rupee is easing. Net buying by FIIs for the month and easing trade deficit is putting rupee on a strong ground,” said Shubhada Rao, chief economist at Yes Bank. “Soaring oil prices and its impact on dollar demand is no longer a worry. With some normalisation of the pattern of capital flows, the rupee should move back towards its fundamental trend, which is to appreciate. I am expecting the upward leg to start from here on with minor disruptions in between,” said Crisil chief economist DK Joshi.
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Due to heavy selling by FIIs and appreciation of the US dollar, RBI had to sell a record $20.63 billion during October to check the steep depreciation of the currency. Forex reserves have depleted by nearly $64 billion since April and is currently hovering around $246 billion.
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