The United States dollar hit a two-decade record high in September of 2022 and appreciated by over 12%. Here we will discuss why a strong dollar has impacted the Indian Rupee and businesses.
The US dollar has been the base currency for international transactions since the 1940s, and around 60% of the global central bank's foreign exchange reserves are held in dollar assets.
The strength of the US dollar (USD) against the rupee (Rs) is, of course, of interest to those who take part in forex trading investments. When comparing how the Rs traded against the USD, in October 2021, 75 Rs was equivalent to 1 USD, and by October 2022, 82 Rs would buy you 1 USD.
Although the Rs weakened against the dollar in 2022, it strengthened against other major currencies, highlighting that the rupee is not falling.
For your average American wanting to travel abroad, a strong dollar is, of course, beneficial. On the other hand, for those considering visiting the US in this current financial climate, it will put significant pressure on holiday funds.
Although it is clearly beneficial for America converting dollars to other weaker currencies, it is a disadvantage to the tourism industry within the United States. A benefit for the US economy of the strong dollar is that imports will be cheaper, and this includes raw materials from developing countries.
Developing nations have become increasingly reliant on the US dollar for trade and currency exchange. As this was happening, developing and low-income nations borrowed the dollar for essential goods such as oil and found themselves in an incredibly difficult situation.
Once the federal reserve started hiking interest rates in 2022 in an attempt to offset inflation, investors moved towards US-dominated investments.
Sri Lanka is one of the worst nations affected, with a 50% increase in average consumer prices. The strong dollar's impact on another economy was clearly seen with the unraveling political crisis in Sri Lanka and the resignation of the country's president.
All aspects of the Indian economy are impacted by a strong USD, both negatively but with potential positives, for example, for Indian businesses exporting goods to America. Despite the fears of global recession and uncertainty, Indian exports are predicted to continue rising and be only moderately impacted by the weakened global demand.
Although most developing countries are dealing with elevated debt and are facing a sharp downturn this year, India, on the other hand, is predicted to produce the highest growth, at around 6% this year.
There is a spotlight on the need for countries to break their reliance on the United States as the foremost reserve currency for the global economy. China has already started this process with the Cross-Border Interbank Payment System, which will allow China to participate in international transactions without the need for USD.
In the short-term, Indian business owners and investors should keep in mind that the US dollar is most likely to remain the dominant currency for the time being.