After shrugging off the continuous rise in dollar index for nearly four months, the Sensex has finally reacted to the strength in the greenback by losing nearly 827 points or 3% in last one week. Concerns over the US Fed Reserves move towards a hawkish policy stance took the dollar index a gauge of the US currencys strength against a basket of six major currencies to a 14-month high, Indian equity market has rekindled its negative relationship with the US currency. In the last decade, it had maintained a negative correlation of the order of 60% with the US dollar as this equation is also weakened by quantitative easing measures taken by several policy makers that drive the asset prices and fund-flow between various asset classes.
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Despite the latest correction that more or less coincides with a 4.5% decline in the MSCI emerging market index, there has not been substantial profit booking by the foreign investors. FIIs exited close to $150 million of the Indian shares in the last two sessions and have been net buyers of Indian stocks in September so far. For 2014, FIIs have purchased $14 billion in the Indian stocks, highest among any emerging markets. Besides, a general revival in investment outlook towards markets, the recent fall in commodities, especially crude oil prices, have landed a support to buying interest as lower prices are supportive to the import bill of the country.