Near-term outlook for US dollar is bullish. Rupee may feel the pinch

By Bhavik Patel

Dollar has bounced back from Friday even after a couple of US economic indicators missed their mark. The greenback is up across all major pairs.

The US imposing a tariff of 10 per cent on $200 billion worth of Chinese goods has put focus back on the risk aversion scenario. Earlier, three factors helped DXY (Dollar Index) trade at sub-94 levels, which are slowdown in inflation, miss in retail sales expectations and a softer tone on trade. But all the losses of the index were made up when US President Donald Trump announced additional tariffs on China.

The escalation of trade tension is a positive for the dollar as investors are looking for a safe haven during the times of uncertainty. The US currency is expected to remain strong as China has fired back with a new set of tariffs on US products.

A September rate hike is fully priced in, but chances for December one may have thinned after weak inflation and miss in retail sales numbers.

Many emerging market economies are making some progress in containing currency fallout because of high US rates and dollar. We have seen rate hikes in Turkey and Russia last week. Measures by Indian government fell short and we saw the rupee flirting with 73.

Thanks to steps taken by many emerging markets such as Russia, Argentina and Turkey, we are seeing emerging market currencies except India’s rupee gaining some strength against the dollar. The steps taken by the Indian government are seen as inadequate and there is no clarity yet on which non essential imports will be cut down.

Another factor for a strong dollar is rising 10-year US Treasury yield. Bond yield has topped 3 per cent after May and we know that rising bond yields attract investors to invest and demand for the dollar will go up.

We expect the US dollar to trade stronger. The wild card still remains trade tariff. Any further escalation in trade frictions will see traders scurrying for dollar, which will leave our vulnerable currency more vulnerable. We are expecting some respite in the currency when the RBI will hike interest rate. Till then, it will be a roller coaster ride for the rupee.

(The writer is senior technical analyst, Tradebulls Securities)