Hey reader! We’re back with Finance Unwrapped after a brief hiatus. This week’s story includes currencies, currencies, and more currencies! But…
No Unwrapped is complete without a mention of rate hikes.
That’s why we’ve covered the US Fed’s latest announcement and how it has impacted the Indian Rupee and other currencies like the Euro, Lira, and Won.
Back to the 80s
2022 has been a whirlwind of a year. The world looked set to shake off the effects of covid and move into a new era of growth and prosperity. But then the Russo-Ukraine war happened.
Europe decided to retaliate by imposing sanctions on Russia while the Russians cut off the energy supply to key European countries, causing an energy crisis.
Meanwhile, the US was struggling with its own economic problems, stemming from the excessive money printing that went on in 2021. A weak USD means more purchasing power for the average Joe.
That’s why the US CPI increased by a whopping 9.1% in June. In case you’re wondering what the CPI tracks, it’s the cost a consumer like you must pay to acquire a basket of goods and services.
To us Indians, this is when our dads and moms say, “Mehangai badh rahi hai”.
Fed Rate Hike
We live in unprecedented times – the US Fed has never hiked interest rates by 75 basis points three times in a row until… This week. As a result, other currencies have plummeted.
- The Indian Rupee? Above Rs. 81 vs the USD
- The Euro? 20-year low against the USD
- The SK Won? 13-year low against the USD
- The Turkish Lira? All-time low against the USD
You might be wondering why the US has such sway over the currency of other countries. Here’s the short answer.
Being one the strongest economies on the planet, the US is known to have an equally strong currency. The USD is used as a medium of payment in global trades and for settling international debt.
That’s why it is held in the forex reserves of most top countries. Bear in mind that this is not a small sum we’re talking about. The USD is held in droves by countries like China and India.
If the USD becomes costly, the cost of carrying out international transactions will typically go up for most countries. Let’s see what INR, EUR, WON, and LIRA are doing to tackle this problem.
The Indian Rupee hit a record low against the USD this week as it slipped past Rs. 81. For context, the INR was at Rs. 74.91 vs the USD at the start of January 2022.
There’s logic as to why this is happening. If the US offers more attractive interest rates, foreign portfolio investors are likely to flock to the US. In the process, they’ll have to sell their Indian investments.
If someone invests in India, they’ll have to generally do so in INR. This logic applies to other countries as well. That’s why the INR generally tanks when foreign investors exit the country en masse.
As per experts, the RBI intervened this week to maintain the value of INR vs the USD. This is where forex reserves come in handy.
In the event that a nation’s currency loses value against the USD, the central bank steps in to control the situation by selling a chunk of its USD currency reserves. That’s what RBI may have done.
Other than this, the RBI has hiked interest rates by a total of 140 bps across three separate times since May. The repo rate currently stands at 5.40%.
A falling Rupee is a cause for concern as it makes imports costlier, which means you as a retail individual will have to pay more for goods and services.
Around the World in 80 Seconds
1. The Euro
The Euro Zone is suffering from a combination of inflation and recession. Business activity in the bloc has contracted as per the latest data while European bonds and shares are tanking.
Add US Fed rate hikes into the mix and the EUR has fallen to $0.9750 Vs USD on Friday, its lowest since October 2002. We’ve covered the Euro Zone’s story in a previous edition of Finance Unwrapped 👉 Unwrap Story
2. The South Korean Won
The SK Won fell below ₩1,400 against the USD for the first time since 2009. As per reports, mass sell-offs continued even after SK’s central bank reassured of stringent measures to support the Won.
A widening trade balance and a drop of 15% in the Won since the start of the year means that South Korea’s currency is one of the most lagging currencies vs the USD in the emerging markets.
3. The Turkish Lira
While other countries struggling with inflation are hiking interest rates, Turkey is lowering them. In fact, Turkey cut interest rates for two months in a row.
Whether this approach can work or not is up for debate. What is clear is that Turkey’s trying to come to grips with inflation that stands at 80% with a Lira that’s at a record low against the USD at ₺18.38.
What You Should Know
Our world operates in hierarchies. The markets are no different. What happens in one domain has the potential to impact another. Think of all three major financial markets – currency, commodity, and equity.
You need money to engage in anything, even if it’s for basic needs like food. That’s why the value of currencies has the potential to impact the commodity market.
Every company that you know requires goods, services, or both to run its operations. If commodities are costly, operating costs will be costly. As a result, a company’s bottom line may go for a toss.
Guess what this may affect? The company’s stock price. Thus, keeping up with financial markets (not the Kardashians) may help you gain better knowledge. For more such stories, visit our Unwrapped Section!
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