Currency markets gave first indication of trouble

April 16, 2009 by Prakash Dhawan · Leave a Comment
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The first indication of the impending turbulence in the equity market came from the currency markets. After remaining in a constant ratio mode for 15 years, the Japanese yen gained strength against the US dollar. This changed the whole equation and a large part of the funds, which were floating in the world equity and commodity markets, started to feel the effect as carry trade started to unravel. Since the interest rate in Japan was zero, a large number of hedge funds used to raise money from Japanese investors and its banks, deploying them in various assets classes world wide, including the Indian equity markets.
The moment yen started gaining strength, investors began to withdraw funds to protect themselves from getting hit on currency accounts. This had a spiralling affect as hedge funds started to liquidate their holdings across the globe. The disturbance in dollaryen balance also had a negative impact on other crosscurrency relationships.
This re-adjustment between dollar and yen is one of the main reasons for the large-scale losses, which several Indian companies incurred in 2008.
Some of the established relationships between various currencies underwent a sea change. The pound sterling, which has always been gaining against the Indian rupee, weakened for the first time. While the readjustment between the dollar and the pound is one reason for this weakness, another major factor for the rupee becoming stronger against the pound is the wealth of the Indian diaspora. With a large number of banks in UK facing crisis of confidence, rich NRIs from UK remitted huge amount of pounds to Indian banks, thereby strengthening the rupee, In fact, the pound is the only major currency against which the rupee is quoting at a gain of more than 5 per cent, compared with the same time last year.
Despite the dollar losing its sheen against major currencies of the world, because it was printed liberally, the rupee lost against the dollar because of the high fiscal deficit in India.
The dollar is expected to remain weak against most other currencies for another year. It is only after the eco nomic recovery gains momentum in the US that we are going to see dollar regaining its position in the currency markets.

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Rupee rallies by 36 paise to 50.34/35 vs dollar

April 2, 2009 by Prakash Dhawan · Leave a Comment
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With the sharp rise in equity markets and expectations of more capital inflows, the Indian rupee today rallied further by 36 paise to close at 50.34/35 against the greenback.

In quiet trade at the Interbank foregine exchange (Forex) market, the local currency opened higher at 50.30/32 a dollar against its previous close of 50.70/71 and ended at 50.34/35. On March 31, it was up by 48 paise.

The rupee moved in a narrow range of 50.24 and 50.42 a dollar. Mainly the continued rally at the equity markets supported the rupee as the Sensex today closed sharply up by 447 points or 4.51 per cent. In straight three sessions of rally, it jumped by 780.69 points or 8.16 per cent.

Asian indices also ended in the green, gaining between 0.72 per cent and 7.41 per cent on the back of Wall Street going up yesterday due to expectations of an early recovery in the US economay, which showed improvements in manufacturing and housing data. Fresh capital inflows on April 1, after a couple of days of sell-off, as per provisional figures, also boosted market sentiment. A weak dollar in Asian trade today against its major rivals also helped the rupee rally.

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