US trade war likely to weaken rupee to all-time low against dollar

The Indian rupee would continue to witness pressure in the coming days, but it should get respite in the medium term as trade protectionism ends up hurting the US economy, a net importer of goods.

For now, there is every possibility that the rupee would depreciate another 40-50 paise, and may even touch record lows of 68.85 a dollar. 

However, breaching record lows would be highly unlikely, considering that the recent fall in oil prices and all indications point towards a decline in the dollar. 

The US dollar strengthened sharply since January. From 88.25, the dollar index has moved up to 94.75 level. The index measures dollar’s strength against major global currencies.

“We expect dollar strength to reverse in the next six months,” said Kaushik Das, India economist of Deutsche Bank AG. 

“We expect rupee to reach 67 a dollar by September and then 66 by December, provided the currency does not hit the all-time low of 68.85 a dollar,” he added.

According to Satyajit Kanjilal, managing director of Forex reserve, the dollar would have weakened, but for the rate increase by the US Federal Reserve. But the rate hike has not been well absorbed by the economy, he said.

“The flat yield curve in the US is not a good situation to be in. It shows that the economy has not absorbed the hikes well. The tax cut and trade protectionism will end up hurting the US economy and the dollar should retreat,” he added.

Kanjilal sees crucial resistance at the 68.25 level, and said the rupee would bounce back to 67.50.

But for now, at least till August end, the pressure on the rupee would continue.

“It is possible that the rupee would hit its lifetime low by the end of September, and may even hover around 70. US trade protectionism is not only against China, but also against India, no matter how small it is,” according to  Ritesh Bhansali, assistant vice-president, Mecklai Financial. 

Rupee is part of a group of emerging markets currencies that have recently come under pressure due to Fed’s withdrawal of accommodation.

“The recent weakness in the rupee, from 64 to 68, was long overdue. The latest round of weakening has actually not hit the rupee that much. If you see, currencies in Brazil, Argentina, Turkey, South Africa and South Korea have come under pressure. The next round should be Indonesia, India and Thailand,” said Samir Lodha, managing director, QuantArt Markets Solutions.

Lodha expects the rupee to hit 70 a dollar, but only by the end of 2018, or in 2019. 

The non-deliverable futures market is showing that investors expect the rupee to depreciate another 40-50 paise.

The rupee closed at 67.99 a dollar on Monday, after hitting 68.16 a dollar intra-day.

“The reason for the loss won’t be trade protectionism, but the US Fed rate tightening and local political uncertainties,” said Lodha.  

However, according to the head of treasury at a large public sector bank, there is no reason for the rupee to depreciate much when oil prices have started retreating.

“The rupee does not behave the way other currencies in the region do, because we are not dependent on exports. Oil prices are unlikely to hit $80 a barrel, and if there is a pressure on the rupee, the RBI can always come up with dollar deposit schemes of $30-35 billion. The rupee should strengthen from these levels,” he added.