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Customers at Lulu Exchange in Sharjah. Image Credit: Ahmed Ramzan/Gulf News

Dubai: The Indian rupee’s strength since the start of the week has eroded, as did those of the euro and pound sterling, after fresh data emerged that the global economy is still reeling from inflation.

The Indian rupee started Wednesday at 21.65 levels to the dirham after being in the 21.56/21.57 through yesterday. “It was a double blow that’s sending the rupee down, first the US inflation numbers and then later on Tuesday, the ECB data,” said a senior treasury analyst. “And they didn’t bring good news.”

That was enough to send the US stock markets into a slide, with the key index dropping more than 600 points, and since matched by all the main Asian stocks this morning. India’s BSE Sensex is lower by 404 points, but only after recovering some ground.

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It’s been a complete U-turn since yesterday – at one point it seemed that the rupee would keep firming up further. In dollar terms, that meant the possibility of touching 79 to the dollar. The rupee closed yesterday at 79.15 and started today at 79.60.

“The markets are turning jittery – what many though was going to be plain sailing until the Fed meeting next week is not turning out to be one,” said an FX analyst.

Stock market US stocks
Tuesday turned out to be about crushing some of that momentum building back into US and global stocks. In Asia, investors reacted with caution and currencies were again in retreat.

Pakistan rupee too gets caught up

The PKR is now at 236.50 against the dollar, and within sight of the lowest point ever of 240 (which was where it was in July). “The devastating floods and the steep cost of construction are being factored into the PKR’s current weakness,” said a FX watcher. “That’s offset the feel-good from the new IMF deal and the other bilateral arrangements Pakistan struck with some of the Gulf states and China.”

The PKR is down 33 per cent in the year-to-date.

A currency deep dive

It was the same story for the euro and pound – start the week on relatively solid footing and then on Wednesday hit the skids. The euro’s trading under par - at 0.99 - to the dollar, and since the start of the year is weaker by 14 per cent. Constant talk of inflation and a looming energy crisis keep pricking euro’s prospects.

For the pound, the slip up since January 1 this year is 16 per cent. The dollar is at 1.15 to the pound, quite some distance away from the 1.35 at the start of the year.

Yen’s crash

Then there is the Japanese yen, and it does not make for a pretty sight. After starting the year at 114 to dollar, the yen’s taking massive pressure and trading at 143.40. “With the yen, it’s not just the dollar’s strength, but domestic economic policies too that are fuelling the sinking,” said an analyst.

No one saw this coming
To say the least about the most, the latest US CPI data hasn’t been as soft as investors hoped it to be, nor has it been as optimistic as investors priced it to be. The 10% fall in energy prices was compensated by higher rents, medical care and food prices. All items excluding energy rose 7.4% in the past three months.

That was faster than the figures printed last spring.

It’s needless to say that the hope of seeing a dovish pivot regarding the Federal Reserve policy is clearly dashed. Activity in Fed funds futures price in a 100% chance for at least a 75bps rate hike at the FOMC’s meeting next week, while there is 34% chance of a 100bp hike next week.

Bets that the Fed’s target rate will go above 4% by the end of this year spiked to 80% from 25% before the CPI data yesterday. The US benchmark rate is seen at around 4.3% in early 2023.

And the chatter of a possible rail strike in the US - which would send another supply chain shock throughout the economy - is a fresh factor that could prevent inflation from falling this month, and adds to the hawkish Fed expectations.

- Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank