The dollar index has surged, and the global equity markets have been beaten down badly after the US Federal Reserve meeting outcome. The Fed reduced their policy rates by 25-basis points (bps) in its meeting on Wednesday. This was in line with the market expectation. Now, the Fed Fund Rate (FFR) stands are 4.25-4.5 per cent.

The dollar index surged from around 107 to 108.25, the highest since November 2022. The Dow Jones Industrial Average (42,327) tumbled over 2.5 per cent on Wednesday. The major Asian equity indices are all down in the range of 0.5 to 1.5 per cent today. In India, the benchmark indices, the Sensex and Nifty 50 are down over a per cent each.

The trigger

The surprise for the markets and the trigger for the sell-off in equities came from the Fed’s economic projections. The US Fed now has left the doors open for just a total of another 50-bps rate cut for the whole of 2025. In its previous forecast made in September, the Fed had projected a total of 100-bps rate cut next year.

In addition to this the forecast for inflation was also revised higher. In September, US Personal Consumption Expenditure (PCE), the Fed’s inflation gauge was projected to be at 2.1 per cent next year. This has been revised higher and now the central bank expects the PCE to be at 2.5 per cent in 2025. This implies that even after rising interest rates to the highest level in nearly 17 years, efforts to bring inflation to the target 2 per cent still remains challenging.

So, high inflation projection seems to have forced the US Fed to slow down the pace of rate cuts next year. In the press conference, the US Fed Chairman Jerome Powell said that they will be more cautious going forward. He also indicated that the slow pace of rate cuts next year is due to the high inflation expectation and the uncertainty surrounding it.

More strength

The dollar index (108.10) is looking strong on the charts with support in the 106-105.50 region. A strong follow-through rise from here can take it up to 110-111 in the next few weeks.

From a long-term perspective, the dollar index has potential to target 118 in the first half of next year.

So, a strong dollar will add more pressure on the other currencies, especially that of the emerging markets. The Indian Rupee (USDINR: 85.05) fell to a new low of 85.06 in early trades today. There is some support at 85.10. A break below it can take the rupee down to 85.30 in the short term.

An eye on yields

The US 10Yr Treasury yield (4.52 per cent) has just risen above a very crucial level of 4.5 per cent. If it continues to stay above 4.5 per cent, then there is room for it to rise towards 4.8 per cent in the coming weeks. This can aid the dollar index to go up and in turn will add more pressure to the equity markets.

More fall

The Dow Jones Industrial Average (42,327) has room for a fall to 41,500. Intermediate support is at 42,150 from where a short-lived corrective bounce to 43,000 is a possibility. The level of 41,500 is a strong support where the current fall can halt possibly.

On the domestic front, the Nifty 50 (23,965) has been dragged below the key support level of 24,200. Immediate support is at 23,800. A fall below this support can take the index down to 23,500.

Published on December 19, 2024