Markets’ wild moves shows the US dollar is still king

What a week it was in the stock markets globally. It started meekly with traders and investors feeling their way through the new week and then things started unfolding. Markets globally were spooked and economic fundamentals were abandoned and panic set in.

The event that spooked markets were fears of higher US inflation upending global monetary policy moves to keep financial conditions under check. Although many global benchmark indices recouped some of their losses, except for major European and Chinese benchmark indices, global markets ended the week in the red.

This puts paid to predictions that the US dollar’s preeminence in global trade is on the wane. You are wondering how this is about the US dollar’s status globally. Let’s get into that.

US’ economy moves trade and markets

If you are the de facto global reserve currency used in trade, any movement of investment flows into the US dollar and dollar denominated assets will move markets. We had examined the rise of the Chinese yuan as a substitute to the US dollar as a reserve currency and concluded that there is still a lot to be done before the yuan dislodges the US dollar. The past week kind of lays out why this is the case.

The US is the largest economy in the world. What happens there impacts the world. For example, the higher interest rate regime in the US because of the US Federal Reserve’s monetary tightening has created economic uncertainty. No matter how fast the US economy is growing.?

This led to clients of Indian IT services companies cutting down on their expenditure on technology upgradation. This is leading to lower revenue and profit growth of Indian companies like TCS , HCL Tech , Infosys , Wipro , among others. This in turn is leading to lower hiring of freshers across the IT sector, and also some level of moderation in salaries of engineers in the sector.

Essentially, the US Federal Reserve’s policy change two years ago is hitting the job prospects of many Indians, just like a surge in IT expenditure a few years ago led to higher salaries across the board.

Back to basics

Back to the US bond markets shaking global markets out of their slumber. On Thursday, major US companies reported good quarterly earnings, which coincided with the announcement of a scorching 4.9% quarterly growth of the US economy in the July-September period. This sent US futures higher overnight. As a result, Indian markets bounced back again.

While the bounceback in Indian markets and globally could be attributed to a risk-on sentiment, it’s merely a mirage. Indian fund managers are sitting on copious amounts of funds coming in from SIPs into mutual funds. They can limit the bearish trends a little bit, but when foreign money heads out the door, markets usually get spooked.

US treasuries, apart from gold, is still a safe haven asset that many in the world prefer over many others. So when people rush to buy up dollar assets, they are ready to sell their emerging market holdings including Indian shares. Foreign investors have been net sellers in the Indian market in September 2023.?

And they were for much of the last week as well. Essentially, dollar flows heading out of the door in hordes spooks most people and markets globally before they can recalibrate their trading positions. Is that an overreaction? Yes. Will it change anytime soon? Only time will tell.

Graph of the week: