Highlights:
- Dollar index strengthened 3.70% over the last month. Whereas EUR, GBP, JPY and INR weakened by 3.29%, 2.69%, 5.54% and 1.27% respectively.
- Key market driver was a surge in 10Y UST yield – which rose ~50bps over the last month due to a confluence of factors (including Treasury Department’s announcement of higher net borrowings, rating downgrade actions and resilient economic data).
- However, going ahead, UST yields are likely to moderate as Fed reaches the end of its hiking cycle.
- We expect dollar index to trade between 100-104 in the near term. Dollar gains are likely to be limited on account of narrowing interest rate differentials and loss of its appeal as a safe-haven asset amidst rising global growth optimism.
- We expect EUR/USD to trade between 1.08-1.12 in the near term. Euro is likely to benefit as ECB holds rates higher for longer than Fed. However, any appreciation is likely to be limited on account of Eurozone’s bleak growth outlook.
- We expect GBP/USD to trade between 1.26-1.35 in the near term. GBP is likely to benefit despite concerns over UK’s growth as interest rates in the UK remain higher than any other G10 nations.
- We expect USD/JPY to trade between 140-148 in the near term. JPY is likely to benefit from BoJ’s tweak of its yield curve control which signalled the beginning of the end of its ultra-loose monetary policy.
- We expect USD/INR to trade between 81-83 in the near term. INR is likely to benefit from hawkish RBI, robust domestic growth and global risk on sentiment. Further, ample forex reserves will enable RBI to curb any volatility that may arise from volatile UST yields, oil prices and weak yuan.
