Even as the Indian rupee fell to a near 10-month low to touch 62.33 against the US dollar, it has been quite stable when compared with other emerging market currencies.
The rupee fell only 3.9% over the last five months against the strengthening dollar. The Russian ruble has fallen by 61%, the Brazilian real 17.5% and the Mexican peso 11.7% during the same period.
A stronger dollar is here to stay, says a recent report by JP Morgan, and the impact would be limited if the dollar rise is orderly. But a more dramatic strengthening could pose greater risks.
WHY IS THE DOLLAR RISING?
* Relative growth: US economy grew at 3% in Q3 of 2014, while the euro zone, Japan and China have slumped
* Monetary policy: The US Federal Reserve is expected to raise interest rates in 2015 on US growth firming, which will be higher relative to other developed economies. This will attract more capital flows to the US and consequently, a stronger dollar
* Oil output: Increased shale oil output reduces US demand for imported oil. This reduces the current account deficit of the US, reducing the global supply of dollars
Impact on emerging markets
The report says that emerging market equities have had a strong negative correlation with the dollar
A strong dollar leads to capital outflows from emerging markets. But this time, emerging markets may not react the same way and most are better placed to withstand a stronger dollar than the late 1990s
THE RISE AND FALL OF THE US $
The US dollar trade-weighted index (TWI) is a measure of the value of the dollar relative to other world currencies
THE CORRELATION OF EM ECONOMIES WITH THE US $
* The MSCI Emerging Markets Index is designed to measure equity market performance in the global emerging markets.
* The Latin America Index captures large and mid cap representation across 5 emerging markets countries in Latin America.
* Asia EM index captures large and mid cap representation across 8 Emerging Asian Markets
* EMEA Index captures large and mid cap representation across 8 emerging market countries in Europe, Middle East and Africa