The US dollar climbed to its highest level in nearly two months on Wednesday as expectations of another Federal Reserve rate hike in the near term strengthened. Rising oil prices also supported the greenback after Iran raised doubts over progress in peace negotiations.
The dollar index, which tracks the US currency against a basket of major currencies and is on upward trajectory from past four sessions, advanced 0.51% to 101.06 after touching 101.23 earlier in the session, its highest level since July 29.
The move came after the Federal Reserve raised its benchmark interest rate by 25 basis points last week to a range of 3.75%-4.00%. Since then, several Fed officials have indicated that further rate hikes could be considered if inflation fails to ease.
Meanwhile, the rupee weakened by 11 paise to close at 95.73 against the US dollar on Wednesday, pressured by the strength of the American currency and a modest recovery in crude oil prices from recent lows. During the session, the rupee touched an intraday low of 95.76 before ending at 95.73, down 11 paise from its previous close.
What does rising US Dollar mean for the Indian stock market?
According to Seema Srivastava, Senior Research Analyst at SMC Global Securities, a rising US Dollar, driven by strong American economic data and a hawkish Federal Reserve, typically acts as a significant headwind for Indian equity benchmarks like the Sensex and Nifty 50.
Srivastava explained that when the dollar strengthens and US Treasury yields rise, Foreign Institutional Investors often pull capital out of emerging markets like India to secure safer, higher returns in the United States. This persistent selling directly hits large-cap index heavyweights, dragging down the broader market and tightening domestic liquidity.
Furthermore, a strengthening dollar inherently forces the Indian Rupee to depreciate. Because India imports over eighty percent of its crude oil requirements, a weaker Rupee drastically inflates the national import bill and widens the current account deficit, even if global oil prices remain stable.
She further pointed that the Reserve Bank of India may be forced to delay much-needed interest rate cuts to defend the currency, thereby keeping corporate borrowing costs elevated and dampening overall equity valuations.
Meanwhile, Kunal Sodhanim, Head – Treasury, Shinhan Bank, said that the combination of a stronger US dollar and a rise in crude oil prices would be a more challenging setup for Indian equities, as both factors can put pressure on the rupee and raise India’s import bill.
“ A sustained increase in crude prices can feed into domestic inflation, widen the trade deficit and potentially limit the scope for monetary easing, while a stronger dollar can add to currency-related concerns for foreign investors. This combination could therefore increase volatility in the Sensex and Nifty, particularly if it is accompanied by higher US Treasury yields and continued FPI selling,” Sodhanim said.
Why rising US Dollar not entirely negative for Indian markets?
Srivastava highlighted that the market impact is not uniformly negative, as the currency shift creates distinct sector divergence. Export-oriented sectors like Information Technology and Pharmaceuticals typically benefit, as their dollar-denominated revenues translate into higher Rupee profits.
“Conversely, sectors heavily reliant on imported materials, like auto, FMCG, oil marketing companies, and corporations burdened with high dollar-denominated debt, face severe margin compression. Ultimately, a rising dollar creates a challenging environment characterized by capital flight and imported inflation pressures,” she added.
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