Dubai may drive Re lower for a while

Dubai may drive Re lower for a while
The Economic Times, November 30, 2009, Page 9

Our Bureau MUMBAI

EVENTS in Dubai may drag rupee below 47-47.5 levels this even, even as relative safety of government bonds attract investors, treasury dealers said. The US Dollar Index, a gauge of the greenback’s value against six majors, rose as much as 1% on Friday, extending its rebound from a 15-month low. It has now strengthened for two straight days and is likely to resume its rise when global markets open on Monday, dealers said.

In fact, such has been the risk aversion among global currency traders that the yen hit its highest level in 14 years on the dollar and other higher-yielding currencies on Friday.

Dealers say the short-term rise in the dollar could possible dent the dollar carry trade and lead to its partial unwinding - a possibility that may lead share prices lower in the coming days. A currency carry trade is an investment strategy in which an investor borrows funds with a relatively low interest rate and uses the funds to purchase a different assets yielding a higher interest rate.

Ridham Desai, managing director, Morgan Stanley said in a recent report that one of the possibilities traders should prepare for is an appreciating dollar index, which can lead to a “detrimental effect on Indian equities.”

Dubai said on Wednesday it wanted creditors of state-owned Dubai World and its property subsidiary Nakheel, to agree to a restructuring of its debt.

Forward markets are already predicting that the rupee will weaken in the coming days. Onshore contracts indicate bets the rupee will trade at 46.77 against the dollar in a month, compared with expectations for a rate of 46.34 two days back. That for non-deliverableforwards (NDF) were quoting at 46.65 down from 46.13 two days ago.

Forwards are agreements in which assets are bought and sold at current prices for future delivery.

KN Dey, director at Basix Forex, a firm that advises corporates on Forex said traders will wait for more clarity to emerge on the Dubai crisis before drawing the knives for the rupee. Krishnan Ramachandran , the Dubai based CEO of Barjeel Geojit said the general expectation is that the Government of UAE will come out with a strong intent or statement of support for Dubai and its related business. This can then arrest the possible sell off that one can expect before the markets open on Monday, he added.