Strong among weak!

FM Nirmala Sitharaman’s googly that made news in Washington D.C.
“The Indian Rupee has performed much better than many other emerging market currencies. The Rupee will find its own level,” said the finance minister at the media briefing.
“The Indian Rupee has performed much better than many other emerging market currencies. The Rupee will find its own level,” said the finance minister at the media briefing.File/GK

At a time when the Indian Rupee (INR) has dropped nearly 10% this year against the dollar, the Finance Minister Nirmala Sitharman at a media briefing in Washington D.C. bowled a googly when she stated that the Indian Rupee hasn’t weakened but in reality, it is the US Dollar that has strengthened.

“The Indian Rupee has performed much better than many other emerging market currencies. The Rupee will find its own level,” said the finance minister at the media briefing.

This unprecedented statement of the finance minister has puzzled a cross section of people and ignited a hot debate among the experts and the currency analysts.

Is the Indian rupee really strong when it’s at the cusp of Rs.83 against a US Dollar?

If the experts’ analyses of the FM’s claim that the falling rupee isn’t weak at the moment against the US Dollar are taken into account, then the minister’s statement holds ground. For instance a Commodities and Currencies Research Analyst at Prabhudas Lilladher Pvt Ltd. is worth quoting. The analyst says: “With the aggressive hike in interest rates, the Dollar Index (DXY) continues to remain strong to its 20-year high, trading at 112.89 levels. This has made the Indian Rupee depreciate against the US Dollar. Domestically, RBI has utilised $100 billion of reserves just to save the slide of the Rupee against the Dollar.”

Notably, the strengthening of the dollar is currently at its highest level since 2000. A look at the performance of some currencies since the start of 2022, the INR has gained 22% against the yen, 13% against the Euro and 6% against emerging market currencies.

Leaving the rupee slide aside, the US Dollar is of course strong and still gaining strength on the back of a hike in benchmark short-term interest rate by the Federal Reserve, so far five times during this year. The Fed has already given indications of more hikes. The rate hike has lured investors and it’s here the US Dollar is gaining traction.

All over the world, the countries, big or small, are expressing pain over the unprecedented surge in the dollar as their local currencies are getting weaker with every passing day. In fact, it is a distressful situation for the rest of the world as the surge in dollar has triggered soaring inflation with skyrocketing prices of essential as well as non-essential commodities, leading to acute financial hardships for common households.

To be precise, a strong dollar with a tendency to further strengthen against other currencies leads to expensive imports. Those who borrow in dollars have to shell out more for less because more local currency is needed to convert into dollars when dollar-based loans are to be repaid. A strong dollar compels the central banks around the world to raise interest rates. According to economists, a hike in key policy rates adversely impacts economic growth and leads to a surge in unemployment. Currency of a country acts as a barometer to measure its temperature of economic activity. A strong economy means a stronger currency. Similarly, a weak economic growth reflects the weak currency of that country. Pertinently, the rate of inflation and indebtedness of a country impacts the value of a currency and a currency losing value is directly related with the fiscal and trade deficits.

We can sum up that a strong dollar is bad news for the global economy. Notably, experts are vehemently stating that the global economy is all set to fall into recession next year. And the reason is the strong US dollar against other currencies.

Meanwhile, the surge in the US Dollar has made currency trading exciting for the investors who trade currencies. However, there is a breed of raw investors who indulge in currency trading without even realizing the risks it carries. Today individual investors have ventured into this market and more and more people are hungry for information on this fascinating currency trading market.

To be a currency trader, you should know that the currency values change from time to time and the reasons are many. Political and economic activities have a great impact on the value of currency of a country. Sometimes they are driven by speculators, and sometimes they are driven by international business flows.

For example, if companies in India are importing large quantities of products made in the US, they will need to exchange their rupee for US dollars to pay for the products. When this is done in very large quantities over a short period of time, it raises the demand for US dollars and the value of the US dollar versus the Indian rupee increases.

So, in short, currencies are the money of different countries, and currency trading is the buying and selling of these currencies. There are almost as many different currencies as there are countries, but the most popular currencies for trading are the US Dollar, the Euro, the British Pound (Sterling), and the Japanese Yen.

Now let me apprise you about risks associated with currency trading. We know the risk element is there in every business. And currency trading cannot be isolated from risk.  In other words, currency trading can be very risky. As is evident from the strengthening of the dollar, currencies tend to be very volatile compared to other markets. The real key to success with currency trading is to use caution and have a trading plan.

It is very important for you to understand your needs backed by risk tolerance capacity to avoid disasters and maximize your potential in the currency exchange market. Once you plan your goals, stick to your plans - a timeframe and a working plan for your trading.

For a beginner in currency trading, choosing a broker needs utmost care. Otherwise a fake or unreliable broker will invalidate all your gains acquired through hard work. Just check that your expertise level and trading goals match the details of the offer made by the broker.

One of the best tips for trading forex is to begin with small sums, and low leverage, while adding up to your account as it generates profits. Keep in mind that a larger account will not necessarily allow you greater profits. Focus on a single currency pair and once you catch hold of the market and better your trading skills, expand your activity.

Last but not the least, restrain your emotions, which means don’t fall victim to greed, excitement, panic or fear. Being logical in your approach and showing less emotional intensity will surely lead you to successful currency trading.

(The views are of the author & not the institution he works for)

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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