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Dollar Rises On Safe Heaven Status

Monday, September 26, 2011

Pramit Brahmbhatt
is CEO of Alpari FinancialServices (India)

The rupee continued to weaken for the third consecutive week as it touched a 26-month low against the dollar. Buying was seen throughout the week as investors fled to the dollar as a safe heaven away from riskier assets. The global economic picture remained dim with negative news flowing from Europe, US and towards the end of the week from China also, that suggested slowdown in the Chinese economy.

Inflation continued to remain a worry for Indian policy makers who reacted with an expected 25bps rise in interest rates, its 12th increase in 18 months, and said it would persist with its anti-inflationary policy stance.

Internationally the global sell-off was witnessed with investors running for safe heavens

particularly the dollar by exiting riskier assets. Gold too tumbled on the dollar strengthening and investors selling gold to made good their positions in other markets or converting gold into cash.

Silver too remained weak as it lost more than 20% in two days. Exports from Japan rose at less than half a pace as expected in a global economic slowdown. A strong yen and Europe's sovereign debt crisis have put the country's own recovery increasingly in doubt. The Yen traded near its life-time high, against the dollar on safe haven status.

The markets were eagerly waiting for the Fed announcement which would provide for further stimulus but they had nothing to cheer for as the Fed in its statement said that it will buy $400 billion of Treasury Securities in the 6-to 30-year range and sell an equal amount of maturities of three years or less. The Fed move has been nicknamed “Operation Twist” because it mirrors an effort in 1961 to buy longer-dated bonds and sell shorter-dated securities.

Crude-oil prices settled at their six-week low as a market selloff intensified and investors sold oil and other commodities to make up for losses in US stocks and other  investments.

China’s Manufacturing Purchasing Managers Index fell to a two-month low this month, indicating a slowdown in the Chinese economy, with industrial output swinging from a modest expansion to deterioration, thereby hurting crude prices.

The International Monetary Fund (IMF) said it would cut its forecasts of economic growth for India, China and other Asian developing economies due partly to slower growth in the rest of the world. Previously the IMF had cut its global growth estimate on Europe and predicted severe problems if Europe fails to contain its debt crisis or US policy makers are deadlocked over a fiscal plan.

We expect the rupee to weaken further as the global picture still remains unclear and with possible recession in sight, rupee is expected to touch 50 to 51 levels in the near term. Buying USDINR near 49.00 levels should be the strategy for the coming week.
 

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