Monday, December 12, 2011

Today's Major Market Move: Indian Rupee Weakens 20% vs US Dollar Since August

The President of the US has made it a prerogative to expand American exports to help boost the struggling economy. The Federal Reserve has joined in on this effort by attempting to weaken the dollar through low interest rates and otherwise expanding dollar liquidity. Here's an extract from a recent missive describing the progress of president's program, called the National Export Initiative:
These agreements also support the President’s National Export Initiative launched in 2010, with the goal of doubling U.S. exports by 2014.  Over 60% of exports are manufactured goods, and exports support over one quarter of all U.S. manufacturing jobs.  The initiative is on track to reach that goal, and has already helped U.S. businesses expand exports 17 percent in 2010 and 16 percent so far this year.
According to the president progress has been made on this front but it would be interesting to see a more detailed breakdown of the numbers. I would argue that the trade deficit would be a more import figure to look at since that is truer indication of how much money is leaving the country. From that vantage point the program has been less successful, with the trade deficit sitting at 34 billion in January 2010 and has been above that level every month since then. You can view the data going back to 2003 here.

What does all this have to do with the Rupee? One avenue for making a country's exports more attractive involves currency depreciation. The Japanese and the Chinese have been using this tactic overtly for years. Lately it's been happening with the other up-and-coming global competitive nations, such as the remaining BRICs (Brazil, Russia and India). Since 8/1 the Brazilian Real has weakened 17%, the Russian Ruble 14% and the aforementioned Indian Rupee 20%. Granted China's currency appreciated during that time, but only a measly .3% and only under continuing heavy political pressure from the U.S. Here's the list of the worst performing currencies vs the U.S. Dollar since Aug 1:

Click here to go to the live table.

These currency battles are a dangerous balancing act. There is an obvious beneficial aspect to cheaper exports but an administration has to deftly gauge how much a population can tolerate higher commodity prices. We in the U.S. are uncomfortable with $100/barrel oil but imagine the sentiment in India where the base commodity price is currently another 20% higher. Futhermore a government and central bank have to take special care that things don't get out of hand and they all of a sudden end up like Belarus:

Click here to go to the live chart.

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