Forex corner: Euro starts on the backfoot

It has been a good start to the New Year for the rupee, with the currency holding its own against the US dollar and gaining strongly against the euro. The INR currently trades at 52.72 per USD and at 67.4 per euro, a gain of 0.45 per cent and 2.67 per cent respectively over the past fortnight.

Domestic factors

Despite the dollar gaining against many currencies, the rupee aided by a couple of factors was able to swim against the tide. One, inflation in the country is showing signs of easing over the last few weeks.

The latest food inflation number has come in at a negative 3.36 per cent, the first such decline in six years.

This has raised hopes of the RBI reducing interest rates, which should aid growth prospects in the economy and boost foreign currency inflows. Next, the government continued its attempts to improve foreign exchange inflows by allowing qualified foreign investors (QFIs) to invest directly in the Indian equity market. Earlier, QFIs could invest only indirectly through mutual funds. QFIs include foreign individuals, foreign pension funds and foreign trusts.

Dollar gains strongly

In a fortnight of thin trading in the global forex markets due to the Christmas and New Year holidays, the US dollar registered good gains against many global currencies. The Dollar Index (an index that captures movement of the US dollar against major world currencies) gained 1.7 per cent over the fortnight and is currently above the 81 level.

The greenback's gains have been especially strong (more than 2.5 per cent) against the euro, which now yields 1.27 US dollars against 1.30 a fortnight ago. Renewed concerns about the debt crisis in the Europe and optimism about economic recovery in the US contributed to the greenback's strong performance. Also, increased geopolitical tensions pertaining to Iran contributed to the flight to perceived safe-haven assets such as the US dollar.

The euro's weakness was, among other factors, due to fears that S&P could downgrade the ‘AAA' rating of France.

Also, there were concerns about Spain needing the help of the European Union to revive its banking sector.

It does not help that the rating of Hungary, although not a Eurozone member, has been recently reduced to junk status by Fitch, the last of the three big agencies to do so.

The coming fortnight may see the euro continue to be under pressure, while the rupee should be range-bound against the USD in the 51-53 zone. The RBI's rate review late this month will influence the direction in the INR.

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