The Dollar Crash – Will others follow? ? ?

With the US Fed announcing an unexpected debt purchases (through treasury bonds), the dollar weakened against most of the major currencies, including the Euro and the Japanese Yen. Even locally, the Rupee appreciated by almost 2% to close at Rs 50.40 per dollar.

The fall in dollar also led to a rally in Crude Oil (nearing $50) and Gold (Up 6.5% from the low of $884 to close at $940) in late trades.

The US Fed plans to buy $1.15 trillion of US Govt bonds and also mortgage bonds. The worry is that this will further increase the already high budget deficits.

The widely followed Dollar Index fell 2.70%, its biggest single day fall since 1971, to a level of 84.60. It had recently made a high of 89.62 (on March 4) which was its highest level in last four years.



Many currency analysts feel that this is the last thing which the US had and it may have used this too early. In fact we may also say that the US may be silently going towards ‘devaluing’ the Dollar, in order to boost up exports and make imports into US costlier. Such a step may benefit US get out of the recessionary phase.

The major implication of this move, as we see it, is that there is a high possibility of other central banks following a similar move – with the intention of depreciating their local currencies. This then leads to a spiral and can surely play havoc with international trade. For instance, China exports more than 70% of its GDP, most of which goes to the US and with the depreciation in Dollar, Chinese exports to US will be highly affected. A retaliatory move may be detrimental.

Thus, this is a catch 22 situation. The cause and effect will keep interchanging affecting global trade.

It seems the more the US tries to come out of recession, the more it seems to go into one!

The short term impact on stock markets has been a positive one; however its longer term impact remains to be seen. A retaliatory move by central banks of other countries may only delay the process of global economic revival and as a consequence stock markets may take more time to bottom out than earlier expected.

The next few days will be crucial for the world markets. Gold and Crude Oil are highly ‘Dollar sensitive’ and price movements in these markets will give us some ‘advance’ clues on what is in store for the global economy.

Whether we like it or not, as investors, we will have to keep one eye on the global financial markets.

CA Rajiv D Khatlawala ,
Head of Research,
Jhaveri Securities Ltd