'US Dollar drops 4.4% in July, may make a comeback in August'

Devarsh Vakil

The Federal Reserve has added almost $3 trillion to its balance sheet since February. Traders feel that Fed Chairman Jerome Powell would follow the central bank's prolific quantitative easing program by cutting benchmark rates below zero. US President Donald Trump's fiscal policies has resulted into federal budget deficit to triple to $3.7 trillion.

This is the reason that many reserve mangers are getting jittery on Dollar. Dollar is the global reserve currency and its humungous supply is affecting its status as a store of value. This is the reason why the dollar recently slumped to its lowest in nearly two years. The US Dollar posted its biggest rout in over a decade, having dropped 4.4 percent in July.

Speculator in US markets sold the greenback on expectations that a surge in coronavirus cases will make it difficult for the US economy to outperform its peers. In the latest reporting week, speculators had increased their US Dollar shorts by an additional $5.2 billion, taking overall bearish exposure to $24.2 billion and thus nearing 2011 levels.

Indian rupee marked the biggest monthly gains since June 2019 on back of weaker dollar index, foreign fund inflows and expectation of recovery in the economy. For the month of July, rupee gained 0.92 percent or 69 paise to 74.82 a dollar.

Foreign funds have bought worth $1.153 billion equities and sold $245 million debt, turning out net buyers for the month of July. Foreign institutions have actively participated in primary as well as secondary markets.

India's high-frequency data show that the supply side of the economy largely recovered to pre-pandemic levels at the end of the July. Power demand increased year-on-year for the first time since the start of the outbreak and the unemployment rate fell to pre-pandemic levels. The demand side showed marginal gains breaking a period of stagnation going back to mid-June.

The country risk premium - measured as the difference between yields on 10-year Indian government bonds and US Treasuries - increased to 5.51 percent at the end of July month, from 5.23 percent in the prior month. India's banking system liquidity surplus increased to Rs 6.29 trillion at the end of July month, up from Rs 6.11 trillion in June.

Recent economic data, expectation of lower interest rates from RBI and weaker dollar index pointing appreciation in rupee in the short run. However, with short positioning reaching extreme levels, recent shorts may face the risk of a corrective move higher given that the short US Dollar trade is looking crowded. Alongside this, given that August is typically a more turbulent period for risk appetite, the US Dollar may begin to reverse course in the second half of the month.

We expect rupee to trade in the range of 76.5 to 74.5 a dollar this month.

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