Dollar strength is a temporary flight to safety; reversal likely in three-six months, says Neelkanth Mishra

Dollar strength a temporary flight to safety, reversal likely in three to six months, says Neelkanth Mishra

The recent dollar surge isn’t about expectations of a shift in the balance of payments—forecasting that right now is “too hard,” says Neelkanth Mishra, Chief Economist at Axis Bank. Instead, he sees it is as a classic risk-off move.

“It’s just de-risking. People want to get into safe assets, or what was considered to be safe assets 20 years back,” Mishra explains. Market “muscle memory” is kicking in—whenever uncertainty spikes, investors “dump all the speculative back of the dollar”. Thus, sending capital back into the greenback and gold.

Gold’s resilience reinforces this risk-aversion trend. “Gold is behaving much better, which again shows that people are really becoming risk-averse,” he noted.

But Mishra expects the dollar’s strength to be short-lived. “Once some certainty emerges, when people see how this dust may settle, which could take three to six months, then perhaps, this reversal will also begin.”

Crucially, the dollar rally runs counter to US policy objectives. “This is contra to what the US government really wants,” he points out suggesting that a pullback could follow once markets regain clarity.

The dollar index has moved up from 100 to 110 since September, at a time when markets started to discount risks related to Trump’s tariffs, taxes, and other economic policy contours.

The rising dollar has resulted in an exodus of funds from emerging markets. Therein, India has seen foreign selling of Rs 1.87 lakh crore since September. Unless the risk perception fades and the dollar starts to soften, foreign investors may continue to sell in India, which, in turn, may keep a lid on stock prices rising again.