The US dollar index, which gauges the greenback's strength against a basket of six currencies, rallied 2.55% to 106.26 in September to hit a 10-month high. This rally was driven by the anticipation that the US Federal Reserve will continue its hawkish monetary policy into next year, given persistently high inflation levels.
During its September 2023 meeting, the US Federal Reserve decided to keep its benchmark interest rate at a robust 5.25%–5.5%, a level not seen in 22 years. However, it hinted at the possibility of yet another rate hike later in the year.
This decision reflects the Fed's belief that it has room to carefully assess the impact of the 11 rate hikes implemented since March 2022 in its battle against inflation before making further adjustments. Following the Fed's meeting on September 20, the US dollar index surged nearly 1% over the subsequent five trading sessions.
As expectations grew that borrowing costs would remain elevated for an extended period, the yield on the US 10-year Treasury note exceeded 4.5%, reaching levels not witnessed since October 2007.
Factors contributing to this outlook include a robust labor market and increasing crude oil prices, which could sustain inflationary pressures and elevate the likelihood of another rate hike by the Fed. Additionally, concerns are mounting as the US national debt surpassed $33 trillion, with the October 1st deadline looming for the 2024 budget deal.
Traders will closely monitor statements from various Fed officials this week for insights into the Fed's intentions for November and December. On the economic data front, the Personal Consumption Expenditures (PCE) inflation, the Fed's preferred gauge of inflation, is scheduled for release on Friday, according to Trading Economics.
The strengthening US dollar is drawing capital back to the United States, affecting other emerging market currencies. For instance, the Indian rupee depreciated by 52 paisa against the US dollar in the current month so far, primarily due to foreign capital outflows.
Recent reports indicate that foreign portfolio investors have withdrawn over ₹10,164 crore from Indian equities in the current month (till September 22).
Brent crude futures, which came close to $100 per barrel, have paused their ascent due to the counterbalancing effect of a strengthening US dollar, making crude oil more expensive for many buyers. Brent crude breached the $90 per barrel mark at the start of September 2023, after a period of almost nine months on supply cuts from OPEC+ majors Saudi Arabia and Russia.
These nations' recent agreement to jointly reduce daily crude oil production by 1 million barrels by December 2023 suggests that a significant decline in crude oil prices is unlikely in the near term.
Global Equity markets also remained under pressure from concerns that major central banks would keep interest rates higher for longer. A strong dollar, surging Treasury yields, and higher oil prices also weighed on sentiment.
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