Why Dollar index has moved above 2018 highs?

The dollar index measures the US currency’s strength against a basket of major currencies.

May 02, 2019 04:05 IST IIFL Derivative Desk Raushan Kumar |

The US dollar index has risen, breaking above the crucial resistance level of 97.75. The index came off after making a two-year high of 98.33. And it’s likely to rise towards 98.75 and 99 in the coming days.
 
The dollar index measures the US currency’s strength against a basket of major currencies. The index contains six component currencies i.e. the Euro, Japanese Yen, Canadian Dollar, Swedish Krona, Swiss Franc, and the British Pound. Technically, there are 24 countries in total total, because there are 19 members of the European Union that have adopted the euro as their sole currency, plus the other five countries (Japan, Great Britain, Canada, Sweden, and Switzerland)  
 
The weekly performance of EM and DM currency:  
Develop Market Currency Movement 
CMP Previous week  Change (%) Status
Dollar Index 98.2 97.47 0.75 Appreciated 
Euro 1.1132 1.123 -0.87 Depreciated
Japanese 111.63 111.97 -0.3 Appreciated 
UK 1.2899 1.2991 -0.71 Depreciated
Canadian 1.3485 1.3376 0.81 Depreciated
Swiss franc 1.0203 1.0154 0.48 Depreciated
Emerging Market Currency Movement 
CMP Previous week  Change% Status
Indian Rupee 70.26 69.36 1.31 Depreciated
Chinese Yuan 6.74 6.71 0.51 Depreciated
Brazilian Real 3.95 3.93 0.61 Depreciated
Russian Rubble 64.67 63.87 1.24 Depreciated
South African Rand 14.42 14.05 2.61 Depreciated
Indonesian Rupee 14186 14045 1 Depreciated
South Korean Won 1161 1137 2.08 Depreciated
 
The decline in the "Euro" is one of the major reasons behind the appreciation of the dollar. Euro has slipped from 1.13 to close to 1.11 levels. Euro has a weight of near 58% in the dollar index. Hence, its depreciating move pushes the dollar higher.
 
Impact on Indian Rupee:
 
On the back of Dollar strength and rising oil prices, the rupee has depreciated to 70.26 from 69.36, any further Dollar strength may keep the rupee under pressure. Moreover, Brent oil prices are trading strong and registered a fresh 2019 high around $75/bl. The India rupee could feel the jitters if the oil price rises sharply from present levels.
 
And as per F&O data, 70 levels of US$/INR is at a premium of 1.4, which shows the broader range for US$/INR is within +-1.4 levels, that is, 71.40 to 68.60 from current prices. Clearly, the market is setting up for high volatility in rupee ahead of the election outcome.
 
Remarks: 
The rise in the US dollar is leading to  depreciation in rupee, which has come above 70, thus pushing IT and pharma stocks higher. In fact, recently considering one of the above factors, we gave " Put Hedge " strategy on "Lupin, TCS, and INFY ".

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