How Trump tariffs will affect rupee
, ET Bureau|
Mar 09, 2018, 09.03 PM IST
MUMBAI: The Indian rupee could well turn volatile in the medium term as tariff walls proposed by Washington threaten to temporarily upend the flow of global trade amid a pronounced hardening in US bond yields.
US president Donald Trump has imposed a levy of 25 per cent on steel and 10 per cent on aluminium imported from all countries except Canada and Mexico. This is likely to elicit harsh responses from China and the European Union, the two top trading partners for US. The EU has already hinted at possible retaliation, and China might join the European trading group.
Separately, US Federal Reserve has already fuelled expectations of a rate increase as the central bank is meeting in the third week of the month to decide upon on the cost of credit. A rise in interest rates may trigger money flows in the direction of the US from other emerging economies.
A combination of these two factors – the rhetoric on trade and interest-rate movements – could cause the local unit to lose up to 2.5 per cent in the coming weeks, dealers said. US benchmark yields are at their highest in four years, setting off speculation of four staggered increases in ballpark rates in the current cycle of increase in the cost of funds. Rising US yields have already dented the fund-raising prospects of an Indian toll-road infrastructure company that had sought to raise money to finance road-laying.
“Investors are bracing for a volatile currency market amid economic uncertainties emanating from the US,” said Anindya Banerjee, currency analyst at Kotak Securities. “The latest statement from the US chair has already kept the market guessing, while the latest tariff proposals are already stoking concerns of a trade war. It can disrupt all other emerging markets, with investors seeking the safety of dollar-backed assets.”
Currency markets were relative stable Friday, but signs of weakness are gradually emerging, Banerjee said.
The rupee was a tad lower at 65.17 a dollar on Friday compared with 65.15 a day earlier. During the day, it traded in the range of about 15 paisa. Investors sought comfort from the fact that nuclear-empowered North Korea has invited the US President for talks.
Back home, investors are looking to square off positions, while some traders are looking at speculative bets.
In the offshore non-deliverable forwards market, the currency is quoting at a five-seven paisa premium to domestic forwards, a potential opportunity for arbitrage trades.
“If the Trump tariff causes any global trade war influencing the currency market, India cannot remain immune to global currency moves,” said Manish Wadhawan, MD & Head-Fixed Income, Global Markets, HSBC India. “India’s imports from the US are not significant. The real threat is from China, which is our emerging market competitor.”
This could well trigger a trade war affecting exchange rates globally.
Moreover, better-than-expected US job data, a gauge for economic activity, could lead to the dollar strengthening against all major currencies. In the past three trading sessions, the dollar index, which measures the unit against six major currencies, has gained about 0.70 per cent.
US president Donald Trump has imposed a levy of 25 per cent on steel and 10 per cent on aluminium imported from all countries except Canada and Mexico. This is likely to elicit harsh responses from China and the European Union, the two top trading partners for US. The EU has already hinted at possible retaliation, and China might join the European trading group.
Separately, US Federal Reserve has already fuelled expectations of a rate increase as the central bank is meeting in the third week of the month to decide upon on the cost of credit. A rise in interest rates may trigger money flows in the direction of the US from other emerging economies.
A combination of these two factors – the rhetoric on trade and interest-rate movements – could cause the local unit to lose up to 2.5 per cent in the coming weeks, dealers said. US benchmark yields are at their highest in four years, setting off speculation of four staggered increases in ballpark rates in the current cycle of increase in the cost of funds. Rising US yields have already dented the fund-raising prospects of an Indian toll-road infrastructure company that had sought to raise money to finance road-laying.
“Investors are bracing for a volatile currency market amid economic uncertainties emanating from the US,” said Anindya Banerjee, currency analyst at Kotak Securities. “The latest statement from the US chair has already kept the market guessing, while the latest tariff proposals are already stoking concerns of a trade war. It can disrupt all other emerging markets, with investors seeking the safety of dollar-backed assets.”
Currency markets were relative stable Friday, but signs of weakness are gradually emerging, Banerjee said.
The rupee was a tad lower at 65.17 a dollar on Friday compared with 65.15 a day earlier. During the day, it traded in the range of about 15 paisa. Investors sought comfort from the fact that nuclear-empowered North Korea has invited the US President for talks.
Back home, investors are looking to square off positions, while some traders are looking at speculative bets.
In the offshore non-deliverable forwards market, the currency is quoting at a five-seven paisa premium to domestic forwards, a potential opportunity for arbitrage trades.
“If the Trump tariff causes any global trade war influencing the currency market, India cannot remain immune to global currency moves,” said Manish Wadhawan, MD & Head-Fixed Income, Global Markets, HSBC India. “India’s imports from the US are not significant. The real threat is from China, which is our emerging market competitor.”
This could well trigger a trade war affecting exchange rates globally.
Moreover, better-than-expected US job data, a gauge for economic activity, could lead to the dollar strengthening against all major currencies. In the past three trading sessions, the dollar index, which measures the unit against six major currencies, has gained about 0.70 per cent.
