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indian stock markets: US dollar index is at one-month low. Will this bring spring back to

NEW DELHI: The US Dollar index (DXY) that had hit a high of nearly 105 in mid-May thanks to its gains against the Japanese yen and euro, has cooled off significantly in recent days.

The index, which measures the American currency’s strength relative to a handful of other majors, often referred to as a basket of US trade partners’ currencies, fell as low as 101.43, its weakest since April 25.

This sink to a one-month low versus major peers on Friday was primarily due to lowered Federal Reserve rate hike expectations by traders amid signs the central bank might slow or even pause its tightening cycle in the second half of the year.

The performance of the US dollar index and emerging market currencies and stocks are inversely correlated, and fund managers often use the index as an indicator to measure the strength of emerging market (EM) currencies and stocks.

“We believe that a falling dollar index is a good news for Indian equities as it indicates bullish views towards emerging markets (EMs). Global markets enjoyed a broad-based rally on Friday, while the yield on benchmark US Treasuries fell after data showed that US consumer spending rose in April and the uptick in inflation slowed, two signs the world’s largest economy could be on track to grow this quarter,” said Mohit Nigam, Head – PMS, Hem Securities.

“This weakening in the US dollar will come as a respite to domestic equities market which has been on a downward trajectory for a while.”

Though it may be too early to be certain, some analysts said they believe there is some chance the index may reverse the trend and rise again. If this happens, the advantage for an emerging market like India will vanish swiftly.

How will index move ahead?
Pritesh Mehta, the Lead Technical Analyst – Institutional Equities, Yes Securities, said in the last five years, this was the third attempt by the US Dollar index to break on the upside, it has retreated off the peak in the last few sessions, yet a big fall is unlikely.

“Would term current move as consolidation rather than a big reversal. In the short-term, inverse correlation has provided relief to equities, especially emerging markets space. Yet, it is too early to conclude that bull run is over in the Greenback,” he said.

“Already, pullback move is in play in multiple global indices and commodities, yet multiple overhead structures on major indices are unlikely to provide a bigger push. For DXY, RSI divergence was seen at the top, resulting in a recent correction. We could see it re-testing April 2020 peak around 100 mark in the near term.”

Gaurav Bissa, Vice President at Trustline Securities said the Dollar index seems to have given a failed breakout from triangle pattern formed on daily charts. “As long as the index trades below 102.5 levels, it is expected to witness negative bias, however, the plunge will be fast once it closes below 101 levels which can then give a boost to equity markets worldwide,” he added.

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