The US Dollar Index compares the US dollar to a basket of six different currencies. The euro has the most weight (58%) followed by the Japanese yen (14%), and the pound sterling (13%). (12 percent).
Though INR has not found a place in this index, any change in the dollar index affects the value of the Indian Rupee. Here is how the dollar index affects the India and Indian Stock Market –
1. When the dollar index rises, INR falls relative to the USD and vice-versa. When the dollar index is falling, FII/FPIs get higher returns in terms of dollar and vice-versa.
2. Commodity prices have an inverse relationship with the index. So
3. Dollar index sometimes affects the gold prices too.
When there is a risk of uncertainty in the global economy, large investors shift their attention to comparatively safer assets like Gold or US treasury bond. Because these investors require USD to purchase these assets, the dollar index rises.
Now India has a lot of outstanding foreign debt which is in dollars. Hence the rise in dollar prices increases the outflow of INR and companies incur losses. The net impact? fall in the prices of their shares.
But you can play this rise of dollar index too..! How?
Well by taking positions in IT and Pharma Industry.
These two industries export their services and products to outsiders and receive the payments in dollars so whenever the dollar rises the income of these two industries rises and the prices of their shares go up.
– Team Arthology