Dollar VS Rupee

The global financial crisis has affected all segments of financial markets. Currency markets affected both by adverse fundamentals and by lack of liquidity. Currency markets are part of the overall financial markets. Foreign currencies were originally used as storage units of assets. Gradually they were used as financial asset for trading purpose to make profit out of the rate fluctuations. The recent global financial crisis weakened the countries and institutions. This had effect of depreciating currency of those nations. The US economy was battered; the currency market still considered US dollar as a safe currency.AS the exports have reduced the currency are getting affected. The reduction in exports has led to reduction in the capital inflow. Due to this currency turnover will reduce substantially.US dollar was involved in more than two-fifth of currency transaction. It has increased by 71% in three years. Trading in currency derivatives is $2 tn per day. The daily trading volume may get to $5 tn by 2010.the daily trading volume in Indian market is approximately about $48 bn, which is nearly .2% of global turnover.

The dollar is gaining since July 2008 against almost currencies, except Japanese yen, whereas US economy is facing a severe crisis.

Factors that may be responsible for dollar weakness: The factor that may weaken the US dollar is the economy is the growth is slowing down. The interest rates are been reduced. The US currency account deficit is high as $ 800 bn, almost 7% of its GDP. Unemployment is rising. The Sub-Prime crisis has shaken the US economy. The US financial sector had major failures in banks and institutions to name the few are Bear Stearns, Lehman Brothers.

Dollar-Past

Dollar was falling by the first half of 2008, the weakness of dollar was associated with the subprime mortgage crisis, cost of US war in Iraq, which drained out major financial resources in unproductive activities, 9/11 twin tower attack in 2001. The decline in dollar created surplus in trade deficit and mounted exports of quality US goods to global markets at competitive prices. Appreciation in other currency influenced institutions to invest in US. These changes in US economy are the reason for current recession and inflation. The weakened dollar caused rising inflation in emerging economies like India, China, and Russia. China started to cut the dollar researches and replaced it with euro. There are many Asian companies which are not ready to accept contract in dollar.oil exporting countries were not interested to trade in dollar.

Dollar Appreciation-Present

The dollar started appreciating during past few months against almost all currencies, with exception to Japanese yen. During October 2008 dollar appreciated against Australian dollar about 16%, 14% against Canadian Dollar. The short term appreciation in dollar cannot be considered as a reflection of gaining its strength. The dollar can be accepted as a strong currency in long run only when fundamentals problems such as current account deficit, unbalanced economy, financial sector problem which are prevailing in US presently get subsided. One can say that the factors that are driving the dollar are more of technical’s rather than fundamentals.

The US Factors:

Increasing Demand of Dollar: The decline in dollar for the past few years enabled the US to become globally competitive, which ultimately led to accelerate export revenue. Decelerated GDP growth and made imports decline. These two factors implied that dollar is pumped to world market shrinking the global liquidity, thus led to dollar appreciation.

Federal Rate Cut: the Rate cuts imply the economic growth. Thus the rate cut by fed may promote growth.