Amid the rising possibility of Donald Trump returning to White House, the dollar on Wednesday strengthened while the Indian rupee hit all-time low of 84.25 against US dollar.
This development has heightened market expectations of higher government spending under a Trump administration, which could lead to a surge in the US fiscal deficit.
Investors anticipate that Trump’s policies, known for prioritizing domestic infrastructure, would push fiscal limits and increase borrowing needs. This scenario has already triggered a rise in the dollar to levels last seen in July.
Consequently, the Indian rupee slid to a record low of 84.25 against the dollar, though it later recovered slightly to trade at 84.18 at the time of filing this report.
According to the market experts, the dollar’s rally to expectations that a Trump presidency would significantly increase government spending, likely aimed at stimulating the economy.
Experts point out that such policies could widen the US fiscal deficit, potentially leading to greater government borrowing. An increase in US Treasury issuance to meet spending needs would elevate Treasury yields as investors demand higher returns to absorb the additional debt. Rising yields, in turn, bolster the appeal of dollar-denominated assets, driving demand for the greenback.
The Mexican Peso has already dropped 3 per cent against the dollar, while the Japanese Yen and Euro have also weakened. Higher Treasury yields not only enhance the dollar’s strength but put pressure on global currencies, particularly those of emerging markets like India.
Ajay Bagga, Banking and market expert told ANI “Trump Trades are on in the markets. With Trump winning North Carolina, his chances of winning 270 Electoral College votes increase. Given Trump policies will lead to higher US fiscal deficit, US treasury yields will rise and as a result we are seeing US dollar rising to July levels. Mexican Peso is down 3 per cent, Yen, Euro are both down. This is a Trump Trade as markets see a high probability of a Trump Victory”.
In India, the rupee has faced continuous depreciation in the face of a stronger dollar, reflecting a challenging environment for emerging markets. The currency’s weakening is attributed to a mix of external pressures, including tightening US monetary policy and global market volatility.
While the Reserve Bank of India has intervened in the forex market in the past to stabilize the rupee, further measures may be needed if the dollar’s strength continues unchecked.
