The dollar continues to touch fresh 20-year highs against six major peers, excluding the rupee. A third back-to-back rate hike of 75 basis points by the US Fed and a persistent hawkish tone of its policymakers have powered the spike in the dollar index — which gauges the greenback against the euro, the yen, the pound, the Canadian dollar, the krona and the franc.
Vishnu Varathan, ED-Head, Economics & Strategy Asia & Oceania Treasury at Mizuho Bank, told CNBC-TV18 last week that he expects the dollar index to test above 115.
Just like gold, the American currency is typically viewed as a safe-haven bet against financial uncertainty such as wild swings in equities.
What the dollar index really is
The US dollar index, or USDX, in simple terms, is the value of the US dollar relative to a basket of six of the six peers.
Components of the dollar index
| Currency | Weightage |
| Euro | 57.6% |
| JPY | 13.6% |
| GBP | 11.9% |
| CAD | 9.1% |
| SEK | 4.2% |
| CHF | 3.6% |
A rise in index value denotes that the dollar is gaining against its counterparts and a fall in index value denotes a depreciation in the dollar's value.
The dollar index was created in 1973 by the US Federal Reserve after the dissolution of the Bretton Woods Agreement. The ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE), maintains the index.
Dollar index and the Indian rupee
The rupee fell to a record low for the third straight session on Monday, September 26. "USDX has an inverse correlation with the Indian rupee. Whenever we see that the dollar index is surging, it leads to pressure coming in on the Indian rupee," said Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking Ltd.
"Though it's not the only variable which affects the Indian rupee," Sachdeva said, "it has a very major effect on the depreciation that we see in the newbie as of now."
Apart from the hawkish stance of the US Fed, Sachdeva says that the escalating tensions between Russia and Ukraine also lead to a lot of safe haven buying coming in the dollar index. Whenever there are any geopolitical tensions, or there are expectations of interest rate hikes, the dollar index rises.
"The third major factor, which is leading to this rise in the dollar index, is the fact that US Fed has actually been very aggressive as compared to the other key central banks."
These factors lead to an increased buying in the dollar index and, consequently, added pressure on its counterparts, specifically emerging market currencies.
All of these factors are leading to the depreciation that we are witnessing in the Indian rupee.
