Sliding Euro Will Impact Sensex

Pravin Palande/ Forbes India

As the euro rate slides, its correlation with the Sensex might rise and directly affect Indian equities.

Hedge funds and professional investors are always looking for countries with lower interest rates where borrowing is cheaper and then invest the same in countries with higher interest rates. Earlier, it was the Japanese yen that gave them this opportunity. After the Lehman crash, the dollar became the funding currency of choice. Investors sold dollars where interest rates were low and purchased currencies like the Indian rupee where the interest rates were high. This carry trade is now moving to the euro.

According to a recent Morgan Stanley report, euro rates are now on a declining trend. Morgan Stanley expects euro rates to fall below the average G10 carry in 2010. They feel that the euro will become a funding currency of choice in 2012 as US rates are moving higher on a relative basis reducing the dollar