The Superman of all currencies

Three things are sure in life. Death, taxes and the global currencies seeing notable shifts as a result of the “growth scare” and tariffs. The USD is back in the spotlight, this time through the widely watched DXY index. While the USD’s trajectory is often measured through its relationship with the euro, a closer look at broader market dynamics shows a more pronounced appreciation against a wider range of currencies, reinforcing the theme of risk aversion and safe-haven demand even as the main index has retreated from recent highs.

The Indian rupee has once again come under pressure, reversing some of the stability achieved through prior interventions. Despite efforts by the Reserve Bank of India to contain volatility, the rupee’s renewed weakness reflects growing economic distress, with potential drivers including capital outflows, slowing domestic demand, or rising external vulnerabilities. In more detail, the INR is affected by a stronger USD, as importers conduct transactions in this currency. Additionally, tariff pressures and the current uncertainty surrounding US actions have led to a sell-off in local equities, resulting in substantial outflows (with record values exceeding $15 billion in just the past few weeks), all of which is leading to the monetary difficulties expressed in the above section.

In contrast, the euro saw a notable jump last week, buoyed by the bazooka announcement in Berlin, which led to a surge in bond yields and causing a short run portfolio rebalancing. Given the euro’s significant weight in the DXY index, this appreciation translated into a temporary “weakening” of the dollar, even though few other currencies moved significantly against it. This once again highlights how the DXY can sometimes create a misleading impression of dollar strength or weakness when viewed in isolation. A more comprehensive measure, the trade-weighted dollar index, tells a different story. Over the past few months, the USD has actually strengthened against most major and emerging market currencies.

The divergence between these two measures suggests that the dollar’s underlying strength is not merely a reflection of fluctuations in the euro but rather a broader function of global financial conditions. As investors seek safety in an environment of persistent macroeconomic uncertainty, circulation of eurodollar funding remains pressured even if certain currencies like the euro experience short-term rallies.

Meanwhile, commodity-linked currencies such as the Australian and New Zealand dollars have at best managed to avoid further weakness the past few months since the last dollar surge/funding disruption. While they have not seen significant depreciation against the USD, they have also failed to gain any meaningful upward momentum.

At the core of these market movements lies a prevailing sense of risk aversion. Investors continue to demand a premium for holding riskier assets. While short-term fluctuations such as last week’s euro rally may temporarily alter the narrative, the underlying trend of a stronger USD is likely to persist unless risk sentiment improves. Until then, currencies like the INR will likely remain under pressure, with all the consequences that come with it – locally as well as globally.