Trading in the foreign exchange markets points to an aggressive Federal Reserve as the main driver, and the Russian-Ukrainian conflict is further hurting the currency quoted on the other side of the dollar exchange.
As central banks have tried to defend their currencies from the fallout from the war in Ukraine, moves in the forex market suggest that central banks need to keep pace with the US Fed to keep their currencies stable.
“‘Go Hard or Go Home’ is the forex market’s message to central bankers trying to hedge their currencies against an energy price shock,” said Chris Turner, global head of markets at ING.
“In practice, this means that unless central bankers engage in aggressive monetary tightening to somehow hedge against a 3% Fed policy rate, local currencies will continue to losing ground against the dollar,” he added.
The inflation spiral is a reality and no longer a threat, exacerbated by the Ukrainian conflict, while raw materials have risen sharply.
Indeed, since Russia invaded Ukraine on February 24, global crude prices have surged, with international benchmark Brent futures hitting a multi-decade high near $140 a barrel last month. .
While crude prices have fallen from those highs, with benchmark futures falling for the second week in a row, international oil prices have remained above $100 a barrel since Moscow attacked Ukraine. .
The Reserve Bank of India reluctantly shifted its focus to inflation after repeated messages in recent weeks that the political outlook was supportive of growth.
While inflation is the main driver, the other reason is the record weekly fall in foreign exchange reserves by nearly $12 billion for the fourth consecutive week, according to the latest report.
This drop in reserves is due to the weakness of the rupee and the intervention of the RBI.