Why is the Dollar Flying High??

Why is the Dollar Getting Stronger??

Exchange rate of currency depends upon supply and demand of that currency. 

Dollar against Rupee in

Oct 2021 : 1 USD = ₹ 75

Oct 2022 : 1 USD = ₹ 82

Now let's check Rupee vs Pound

Oct 2021 - 1 GBP = ₹ 104

Oct 2022 - 1 GBP = ₹ 92

So in the last one year the Rupee strengthened against GBP.

Let's check Rupee vs Euro

Oct 2021: 1 Euro = ₹ 88

Oct 2022: 1 Euro = ₹ 82

So ₹ strengthened against the Euro also.

Let's check Rupee vs Yen

Oct 2021 : 1 Yen = ₹ 0.65 

Oct 2022 : 1 Yen = ₹ 0.55 

Rupee strengthened against Yen also.

In the last 1 year, Rupee weakened against the Dollar but strengthened against all major currencies.

Let's check performance of these currencies against Dollar.

For that we will check the Dollar index. Dollar index measures relative performance of Dollar against 6 major currencies of the world including GBP, Euro and Yen.

In Oct 2021: USD value against 6 major currency = 93

Oct 2022: USD value against 6 major currency = 112

So it proves that the Dollar is actually strengthening. Rupee has no option than to fight against the dollar and maintain its performance well against other currencies. Undoubtedly the reason for the pressure of petrol import on Rupee is there as it covers 30%-40% of our total import.

In the last 1 year, due to the Russia Ukraine war, prices of oil and gas have skyrocketed. India's import bill is getting higher as oil is traded in USD. High Import, less export means demand of USD is also high and demand of INR is less. So despite such negative conditions, INR has no other option than to fight and maintain it's performance comparatively well against other currencies.

Now let's see the reason as to why the Dollar is flying high.

Reason has been the US Federal Reserve rate that remained 0 in Feb 2022 is now 3.5%.

As per rule American banks need to maintain a fixed amount to the US Fed bank on a daily basis. They keep taking a loan from another bank and the interest rate on that loan is called Fed interest rate. When the Fed bank increases interest rate then all investors of the world take out money from their current investment and invest into US Fed bank because investment in Fed bank is considered the safest investment in difficult situations.

There one can invest in the Fed bank only in USD. So one needs USD for investment. Hence demand of USD increases and cost of USD goes high. Exactly this happened in last 6 months.

Why is the Fed increasing the interest rate? It is to control inflation. As the interest rate goes high, the interest rates of saving accounts, FD, credit card, home loan also go high. People stop spending and start investing. Circulation of money goes down in the market, demand goes down and price comes down. It is basic economics.

So to control inflation US increased Fed rates and due to that USD demand increased causing USD to strengthen against all currencies. 

In fact the Rupee actually weakened in true sense during 2008-14.

Check the Fed rates of the last 40 years. 

Fed rates were 0 during 2010-14.

Now check the dollar index of….2001-03 and 2022. It was the time when the Dollar was very strong. 

2008-14 was the time when the Dollar was weak against all those 6 currencies.

Now check performance of Rupee against USD during 

2008 -2014

2008 : 1 USD = ₹ 40 

2014 : 1 USD = ₹ 63

Even when the Dollar was weak globally, Fed rates were 0, INR kept falling and fell around 50%. That was called the Rupee falling. 

In the present condition Rupee is fighting hard against Dollar but maintaining its better performance against other 6 currencies.