The US dollar index has appreciated by about 5% in the last three weeks. The movement of dollar index ? a gauge of US dollar?s strength against a basket of six major currencies ? is crucial for global equity markets including that of India given that it holds a strong negative correlation with global equity markets.
The dollar index after touching a high of 77.8 last week
was trading lower on Monday.
?Even if the dollar index extends towards 75, the level is expected to act as a strong support from where the upmove could reemerge,? said Savio Shetty, derivatives analyst at Prabhudas Lilladher. According to Shetty, if the prevailing uncertainties in the global financial markets intensify, the dollar index could even move towards 80-81 levels. A rise in dollar index value indicates that the dollar is appreciating against euro, yen, Canadian dollar, Swedish krona and Swiss franc on a weighted average basis and vice-versa.
Historic movements of the dollar index against the markets indicate that a close above 76.50 will be crucial for the world equity markets to maintain its current levels while any breach of 77.50-78.80 range could spell further bad news.
According to Bloomberg data, when dollar index had appreciated by about 18% during the period between November 2009 and June 2010, MSCI World Index had fallen 7.4% while emerging markets as measured by MSCI EM fell 3%. Also, at the height of 2008 global financial crisis, dollar index had appreciated 23%. Recent surge in the dollar index value comes on the back of rising uncertainty in the global financial markets leading to risk aversion and adding to the dollar?s status of a safe haven.
After consolidating for four months since May 2010, the dollar index started its upmove towards the end of August with worsening European sovereign debt problems and concerns regarding its impact on the global economy.
Besides the development related to the European debt crisis, funds managers are keeping an eye on the forthcoming US central bank?s policy stance following the next Federal Open Market Committee meet, scheduled on September 20-21.