The US dollar is showing a lot of muscle in 2024.

Every major currency in the world (including the Indian rupee) has depreciated versus the US dollar this year. Emerging markets are the hardest hit, but developed regions like Japan and Europe are also feeling the dollar's heat.  

On April 29, the Japanese yen fell below 160 yen to the dollar for the first time since 1990. The main reason for the yen hitting multi-decade lows is the difference in interest rates between the US (5.5%) and Japan (0%). While Japan is among the worst performers, the effects are also visible elsewhere.

High US interest rates are typically not good news for currency values around the world. And right now, the US rate of 5.5% is at its highest since the past two decades, to curb inflation.

The high rate means that American investments such as government bonds are offering better risk-adjusted returns than most of the world. So investors are doing the logical thing: selling their country’s currency and buying US dollars, to invest in higher return US securities. This rising demand for the USD is strengthening the dollar. 

It's no surprise then, that whatever the US Federal Reserve says about possible interest rate cuts is being tracked around the world. Fed Chairman Jerome Powell is probably the most closely watched person globally right now (the media even attempted detailed personal profiles of him - rare for a bureaucrat - but eventually concluded with a compliment that might also be an insult: that he is "likable without being very interesting").

The appreciation of the US dollar caused the Indian rupee to hit its record low of 83.48 against the dollar on March 22. In an unusual move, South Korea warned against depreciating the won, and Indonesia’s Central bank entered the forex market to support the rupiah. 

But despite hitting a record low, the rupee is among the best-performing currencies in 2024. 

How has this happened? And is the dollar rally set to continue?

In this week’s Analyticks,

• The Dollar Crush: How long will the world have to put up with a rising dollar?
• Screener: Exporters outperforming their industries in the past month, with a high number of 'Buy' ratings from analysts 

Rising inflation delays Fed’s rate cut plans, strengthens dollar

The recent fall in global currencies came after the US consumer price index (CPI inflation) rose higher than expected in March (up 3.5% YoY). With US inflation hanging around like the guest that doesn't leave, interest rate cuts had to be delayed. 

US and India’s CPI inflation yet to reach their Central Banks’ targets

So on May 2, the US Fed left the benchmark interest rates unchanged at 5.5% for the sixth straight meeting, in line with Wall Street estimates. But all eyes were on Fed Chair Jerome Powell’s comments about future rate cuts. And Powell was decidedly hawkish, saying, ‘We do not expect to reduce the target range until we have greater confidence that inflation is moving sustainably toward 2%.’ 

US Fed holds interest rates at a 23-year high due to stubborn inflation

Higher interest rates are pulling investors back to the US, leading to a strong dollar. In reaction, major currencies have extended their losses against the dollar. 

“It has never been truer that the Fed is the world’s central bank”, Jesse Rogers, an economist at Moody’s Analytics, said. 

Indian rupee: The most resilient among major currencies

The Indian rupee stands out in the pack, as it stayed steady in 2023 and has been resilient against the dollar in 2024 compared to other currencies. 

Major currencies across the globe depreciate against the US dollar in 2024

According to CareEdge Ratings, high FPI inflows, India’s inclusion in the global bond index, a strong growth outlook and favourable current account deficit have supported the value of the Indian rupee. 

Another major factor is the RBI’s intervention in the forex market. RBI can stop the fall of our domestic currency by selling USD from its reserve and buying INR. This increases the supply of USD and reduces the supply of INR, thereby increasing the value of the rupee.

RBI is likely to have intervened in March to arrest the rupee's fall as it headed towards its all-time lows. Kishore Narne, director of commodities and currency at Motilal Oswal said, “The RBI generally tends to control the volatility, they won’t let it slip beyond 84.”

The inclusion of Indian government bonds in JPMorgan's emerging market debt index is also a bright spot for the rupee, as it is expected to bring in foreign funds. Bloomberg Index Services has also followed suit, announcing it will add Indian government bonds to its Emerging Market Local Currency Government Index from Jan 31, 2025. These inclusions are expected to bring in foreign inflows worth over $25 billion to India over the next year. This is keeping the rupee resilient. 

However a strong dollar has been more difficult to deal with for other countries. 

Indonesia raises interest rates, while Europe's Central Bank reconsiders cutting them

Indonesia’s central bank unexpectedly raised rates on April 24, to support the country’s depreciating currency. Other currencies that have fallen sharply this year include the Egyptian Pound, the Lebanese Pound and Nigerian Naira, where volatile political environments have worsened depreciation.

In Europe, policymakers at the European Central Bank have hinted that they could cut rates at their next meeting in June. But even as inflation has cooled in the EU, officials worry that lowering their interest rates before the US Fed would widen the rate difference between the EU and the United States, weakening the euro further.

Will the US dollar’s dominance continue? This depends on the rate cut path by the US Fed. If US inflation remains high, backed by a resilient US job market and strong economic growth, interest rates won’t go down any time soon. 

The whole world has to worry about US inflation. If the Fed doesn't cut, other Central Banks will think twice about cutting interest rates even with cooling inflation in their countries, as they want to avoid further currency depreciation. So consumers, including in India, are stuck with higher borrowing costs, and are paying more to buy an apartment or purchase a car on loan. The phrase ‘America sneezes and the world catches a cold’ continues to hold.

Economists and analysts will be closely watching the US inflation numbers for April, which will be released on May 14.  Fingers crossed.

Screener: Exporters outperforming their industries in the past month, with a high number of 'Buy' ratings from Forecaster 

Electrical stocks have the highest number of ‘Buy’ calls among exporters

Volatility in Indian markets is up – the Nifty VIX has risen by 52.3% over the past. Currencies have also grown volatile, which can impact those companies that get significant revenue from exports. But some exporters are more resilient than others.

This screener shows exporters outperforming their industries in the last month with a high number of 'Buy' ratings from Trendlyne's Forecaster. 

Major stocks that appear in the screener are Voltas, Deepak Nitrite, Polycab India, Mahindra & Mahindra, Havells India, Torrent Pharmaceuticals, Aarti Industries, and Alkem Laboratories. 

Polycab India rose by 11% over the past month with five analysts giving the stock a ‘Buy’ rating according to Trendlyne’s Forecaster. Motilal Oswal believes that a strong distribution network and higher capex, with a focus on backward integration, will drive growth for the electrical equipment manufacturer. It also expects the company’s exports to improve on the back of capacity expansion and new distribution channels. The brokerage sees the company benefiting from favourable industry trends, and predicts a revenue CAGR of 14.4% over FY24-26.

Torrent Pharmaceuticals’ stock price increased by 4.4% over the past month and has seven ‘Buy’ ratings from analysts according to Trendlyne’s Forecaster. Prabhudas Lilladher believes that the pharmaceuticals company’s strong presence in highly profitable branded business in the domestic, Brazil and ROW markets will help expand its margins on a YoY basis. It expects the company’s net profit to grow at a CAGR of 28% over FY24-26.

You can find more screeners here.