The rupee fell to a new all-time low of 77.93 against the dollar on Friday amid expectations of aggressive tightening from the US Federal Reserve after data showed inflation hit a more than four-fourth high. decades.
“A phrase that is starting to be used more widely within the central banking community is the need for ‘more aggressive’ monetary tightening to fight inflation,” said Chris Turner, global head of markets at ING.
“Central bankers pushing real interest rates higher will continue to hurt risky assets and pro-cyclical currencies. This is a positive environment for the dollar. of the need for “more aggressive” monetary tightening around the world now,” he added.
Indeed, U.S. consumer prices accelerated in May as gasoline prices hit a record high and food costs soared, leading to the largest annual increase in nearly 40½ years, suggesting that the Federal Reserve could continue with its 50 basis point interest rate. rate hikes until September to fight inflation.
The dollar, as a result, hit a nearly four-week high against a basket of currencies.
“Inflation is now at its highest level in 40 years, with little evidence that it has peaked,” John Doyle, vice president of trading and trading at Monex USA, told Reuters.
“Equities extend losses expecting the Fed to find room to accelerate rate hikes. Greenback gains on policy divergence and risky trading,” he added.
The dollar index, which tracks the performance of the greenback against six other major currencies, rose 0.8% to 104.16, its highest since May 17, and in view of 105.01, the two-decade high reached in mid-May. For the week, the index rose almost 2%, its best weekly performance in 6 weeks.
With US inflation data shaking investors’ risk appetite, the rupiah, which has repeatedly hit record lows in recent months, is expected to continue to break through lows.
However, inflation data from India next week may provide some respite for the currency. May’s consumer price-based index is expected to be slightly lower than the previous month, although still well above the Reserve Bank of India’s target.
The Fed’s aggressive course is also likely to push capital outflows from emerging economies, including India, and weigh on these countries’ currencies.
Indeed, the currency quoted on the other side of the exchange rate against the dollar will weaken.
Global stock markets tumbled and the dollar strengthened on Friday after US inflation data showed a spike in May, raising fears the Fed could tighten policy for too long and cause a sharp slowdown .
“The dire need to fight inflation with higher real interest rates remains a headwind for risk assets, where equities have suffered on both sides of the Atlantic…This cautious risk environment should continue to favor the dollar…” said Mr Turner of ING.
“DXY (the dollar index) remains well supported at 103 and should remain bullish as the US/Fed inflation narrative returns to dominate the markets,” he added.
China’s zero covid policy has also weighed heavily on investor sentiment and raised concerns of stagflation.
Indeed, in a red flag for demand, Shanghai and Beijing returned to COVID alert on Thursday. Parts of Shanghai have imposed new lockdown restrictions and the city has announced a series of mass tests for millions of residents.
The Russian-Ukrainian war triggered the rupiah’s plunge, with the currency surging above 77 to the dollar for the first time in March and since then has been in free fall, with 80 to the dollar not too far away.