How green is your dollar?

The resurgence of the greenback — the US dollar — abroad and the rupee’s fall have upset the calculations of the export-impor...

The resurgence of the greenback — the US dollar — abroad and the rupee’s fall have upset the calculations of the export-import community and the stock markets. Though the rupee, which fell by nearly 5 per cent in the last three months, has now stabilised to some extent, traders are now scrambling to cover their positions.

But the dollar’s return to the centrestage has surprised trade circles. ‘‘Many traders who switched over to euro in the last two years have now come back to the dollar. The dollar seems to be regaining its lost glory,’’ said a dealer with a private bank.

Incidentally, a strong US dollar caused, among other factors, the slowdown in foreign fund flows to the Indian stock markets. Reason: if the dollar gains ground abroad, they would end up making more returns abroad. ‘‘I expect the rupee to fall to around 48 against the dollar by March 2006… trade deficit is expected to touch $50 billion soon. Importers who were caught unawares are buying dollars forward,’’ said Ramu Deora, a leading exporter and former chairman of export body FIEO.

The dollar — under severe pressure for the last two years — staged a recovery in the global current market recently. It soared against the euro by a record 2.50 per cent in the last two weeks and a whopping 14.2 per cent in the current year. Having reached an almost two-and-a-half year high against both euro and yen, it ignored the rising US trade deficit and interest rates.

For exporters, the rupee’s loss and dollar’s gain have come as a bonanza. ‘‘Some exporters who anticipated the current turn of events made a neat pile of money,’’ said an exporter who preferred anonymity.

On the other hand, import costs have escalated. Importers who were caught unawares by the recent developments have started buying dollars in the forward market. That leads to another question: is the rupee set for a further fall?

Though the rupee has recovered from the 13-month low of 46 to 45.68/69 against the US dollar last week, forex experts say the final chapter is yet to be written about its fate. ‘‘The pace of the rupee’s fall has slowed down. The rupee may be range bound in the short-term. It’s difficult to hazard a guess about long-term movement, as the market trend will be a factor in the rupee movement,’’ said an analyst with Emecklai, a leading foreign exchange firm.

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But it’s not the rising dollar alone that’s responsible for the rupee’s fall. ‘‘Slowdown in foreign inflows to India and widening trade deficit brought the rupee down against the dollar,’’ Ramu Deora said.

Inflows from FIIs — who invested over $8 billion in Indian markets this year — have already slowed. FIIs exited $800 million in October pulling down the Sensex by over 1,100 points from the all-time high levels of 8,799. ‘‘The forex weakness worries us – sign that capital inflows are abating following strong equity gains,’’ said a Merrill Lynch study.

And dollar demand is only increasing with import growth outpacing exports. India’s trade deficit widened from $15.4 billion in 2003-04 to $38.1 billion in 2004-05. In comparison, China is expected to achieve a trade surplus of $97.4 billion in 2005. India’s deficit in first five months of 2005-06 at $17.4 billion was 79 per cent bigger than $9.72 billion in April-August last year. That’s another worrying signal for the rupee.