Amidst weakening euro and rupee against mighty dollar, heres what lead analyst Ramkumar Venkatramani has to say!

With the euro weakening and clouds of uncertainties in Europe due to the Russian situation, one should remain cautious about Euro-denominated assets. 

Currencies have garnered investors’ attention lately, as the dollar continues to appreciate against the weakening rupee and euro. With the euro being nearly equal to the dollar now, here’s a beautifully penned down article from Ramkumar Venkatramani, a lead investment advisor at Kristal.AI:   

A brief history of two currencies  

India started to let its currency float (albeit in a restricted way) against the US Dollar in 1993. Despite interim years when the rupee did strengthen against the dollar, the long-term trend has been a gradual depreciation against the greenback. The euro currency came into existence in 1999 and was worth less than a dollar for the first couple of years but has been worth more than a dollar ever since. The recent dip of the euro below a dollar has hence dominated headlines. Very different fundamentals are in play in determining the paths of these two currencies.   

Dollar’s smile  

The US Dollar is said to have a ‘smile’. The smile causes it to strengthen at both extremes of economic performance. When the economy is strong and GDP is growing, dollar-denominated assets see inflows, especially the equity markets thereby, causing an appreciation in the currency. When the world is under economic stress and recessionary forces are prevalent, global funds flow into dollar-denominated assets again. This is due to the dollar’s safe-haven status. Haven currencies are considered ultra-safe, especially during uncertain times. The US dollar’s haven status condition is in even more vogue now due to the fate of other haven currencies. One of such currencies i.e. Japanese Yen has been quite volatile in recent months, losing some of its safety sheens.     

What ails the euro and the rupee?  

Long-term exchange rates reflect relative differences in real interest rates and purchasing powers. On this basis, the euro is not at that much of a disadvantage, especially after Monday’s rate hike. However, the sword hanging above the Eurozone’s head is its energy dependence on Russia. Dependence on Russian gas and efforts to wean off this dependency is likely to increase the costs of European manufacturers and cause a drag on the region’s GDP growth. This is the primary reason for the euro's depreciation against the dollar in recent times. For the rupee, it’s the usual suspects in the form of deficit, oil import, and shoring up dollar reserves.  

Impact on investors 

The dollar’s smile is a favourable factor for investors holding US dollar-denominated assets. The rupee is expected to stay weak or even depreciate further against the dollar. So, it bodes well for investors to increase their allocation to dollar-denominated assets. If there is an eventual recovery in the markets, investors benefit from both the market returns as well as the currency returns. With the euro weakening and clouds of uncertainties in Europe due to the Russian situation, one should remain cautious about Euro-denominated assets.