Weakening US dollar index may boost FPI liquidity in Indian market; largecaps to benefit, say analysts
inflation data released last week bolstered investors’ hopes that the Federal Reserve was close to the end of its interest rate hike cycle. Adding further pressure, US producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years.
The sharp slump in the US dollar index last week, with the index closing below the February and April lows at the 100.82-100.85, reinforced analysts’ views that the American currency formed a major peak in September 2022. According to CLSA, this breakdown provides an initial downside target of 95.
Below this level, the lower boundary of the 2015-2022 trading range offers next support at the 88-89 area. Also Read: HDFC Bank enters $100 billion m-cap club, but fails to pip TCS as number 2 stock It noted that a falling dollar has typically resulted in stronger performance from emerging markets (EM), adding that both the EM ETF and EM Bond ETF are on the cusp of confirming fresh breakout signals. “The relationship between the EM (USD) versus world ratio and the EM currency Index has been a tight one over the years. The clear implication here is this week’s breakdown in the US dollar (strength in the EM currency Index) should support a rerating in EM versus World through 2H23.
In absolute terms, the EM ETF (EEM US) is on the cusp of confirming a breakout from the year-to-date triangle consolidation pattern," CLSA said in a note on July 14. On the domestic side, a falling dollar has helped sustain inflows from foreign portfolio investors (FPI) into Indian equities.
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