The change in the language of the US Federal Reserve in the Monetary Policy statement came as a major blow for the dollar. The dollar index fell from about 96 to 95 levels on Wednesday.
Earlier in the day, the Fed, in its monetary policy statement, said that the “economic growth has slowed down in the winter months”.
In January, the Fed had said the “economic activity has been expanding at a solid pace”. The Fed’s statement on the economy came with a lag since the advance estimate of the 2015 first quarter (January-March) was released much ahead of the US Fed’s 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 from 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 maintained status quo by stating that the rates will be raised when it sees further improvement in the labour market and is confident that the inflation will reach its medium-term target of 2 per cent.
There are two other factors 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 show a mixed signal. While the housing starts have remained stagnant for more than a year, sales of new homes are not picking momentum.
On the trade front, the strong dollar is hurting US exports. The US exports have been falling consistently since November. The trade data show that 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 up 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 the US Federal Reserve meeting outcome. The dollar index which was trading near 97 early this week has tumbled now to 94.5. 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 a low of 63.72 on Thursday before recovering slightly to close the day at 63.42.
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 $724 million this week in the Indian equity segment.
If this selling intensifies, then rupee could come under more pressure. Unless the domestic concern fades away, the rupee could continue to weaken further irrespective of the global weakness in the dollar.