Dollar tumbles as US economic growth slows

Washington (Apr 30)  The change in the language of the US Federal Reserve in the Monetary Policy statement has been a major blow for the dollar.

On Wednesday, the Fed in its monetary policy statement said that the “economic growth has slowed down in the winter months”.

Earlier in January, the Fed had stated that the “economic activity has been expanding at a solid pace”. Actually the Fed’s statement on the economy came with a lag since the advance estimate of the 2015 first quarter (Jan-Mar) was released much ahead of the US Fed released its policy statement. The US economy posted a sluggish 0.23 per cent growth after recording a 2.2 per cent growth in the final quarter of 2014. The growth slowdown could keep the Fed patient in hiking the interest. This is evident as no signals were revealed from Wednesday’s meeting on the timing of the rate hike. Rather the Fed has maintained status quo by tating that the rates will be raised when it sees further improvement in the labor market and is confident that the inflation will reach its medium-term target of 2 per cent.

There are two other factors on which the Fed is consistently concerned about. One is the recovery in the housing sector and the other is the fall in US exports. Data on the US housing sector is showing a mixed signal. The housing starts have remained stagnant for more than a year while the sales of new homes are not picking momentum.

On the trade front, the strong dollar is hurting the US exports. The US exports has been falling consistently since November. The trade data shows that the exports have dropped 6 per cent from $198.71 billion in October to $186.25 billion in February. The dollar index has surged about 10 per cent during the same period.

As the Fed always reiterates that its decision would be data dependent, a close watch on the US housing sector recovery and pick in exports could give the markets an early signal on the Federal Reserve’s next move.

Rupee remains weak

Major currencies like the euro, British Pound have strengthened after the weak US GDP data and after the US Federal Reserve meeting outcome. The dollar index has tumbled to 94.6 now from 97 levels early this week. But the global weakness in the dollar has failed to spill over to the Indian rupee. The Indian currency has weakened from 63.14 on Tuesday to 63.6 now. The domestic factors like sell-off in the equity markets and tax issues on foreign investors are over shadowing the global positives. There has been an outflow of $600 million this week in the Indian equity segment. If this selling intensifies, then rupee could come under more pressure. Having said this, unless the domestic concerns fades away, rupee could continue to weaken further irrespective of the global weakness in the dollar.

Source: TheHindu