The Central Bank of the United States – The Federal Reserve, since the beginning of 2020, has printed over $3 trillion with significant printing activity happening between March 4th, 2020, and April 15, 2020, when the assets of the central bank rose by nearly 50% from $4.24 trillion to $6.37 trillion respectively.
The printing was majorly carried out to combat the impact the COVID-19, which has resulted in a weakening economic condition.
But how does it impact the U.S. economy, currency, and Indian investors?
How does the central bank put money into the economy?
The Federal Reserve prints money and buys bonds equivalent to the money printed from financial institutions.
This leads to a supply of currency in the economy, which is likely to drive down the interest rate (for borrowers), thereby putting an impetus on their consumption pattern.
Additionally, lowering the interest rate also compels businesses to borrow and expand their presence. These activities are aimed at reviving the economy.
The printing of currency, however, has led to a weakening of the dollar as seen in the dollar index chart (See charts below).
What happens to the U.S. Dollar Index?
The U.S. Dollar Index: It is a barometer for the international value of the U.S. dollar and the world’s most recognized, publicly traded currency index.
The U.S. Dollar Index measures the value of the U.S. dollar relative to a basket of the top 6 currencies: EUR, JPY, GBP, CHF, CAD, and SEK. As seen from the chart below, the dollar has been weakening.
At what rate is the money printed?
The maximum growth in printing was during the weeks ending March 18th, March 25th, April 1st, April 8th, and April 15th.
Not surprisingly, the Dow Jones Industrial Average after bottoming out around March 18th, started to gain traction with the week ending April 8th showing a 12% increase over the previous week.
During the period between March 18th to June 10th, the DJIA returned as much as 36%.
The explanation for the rally is simple the money created by the central bank found its way to the American stock market and also the market outside of the U.S. in some cases.
Considering the FPI activity, the data is in line with what one can expect with the creation of liquidity by the central banker.
12 months FPI flow – India in Asia looking for constructive long-term growth
Has the newly printed money helped the economy?
Well, the extent of the downturn and pace of recovery is uncertain and is likely to remain the same in the days to come.
Until a trend for full recovery from COVID-19 is seen, re-instating confidence amongst the citizens remains a daunting task.
Only with full recovery in sight, people will be able to re-engage in a broad range of activities. Also, the policy actions, to provide relief and support the economic recovery, at different levels of the government is likely to show some signs in days to come.
What does it mean for Asian investors, particularly in India?
A weakening dollar signals a higher risk appetite and is considered positive for growth in emerging economies.
Further, the likelihood of renewed weakness in the U.S. dollar following Democrat Joe Biden’s presidential victory should give another reason for investors to favor Asian stocks, including India.
Robust local currencies help bolster the national balance sheet, and borrowers benefit from lower dollar-denominated repayment.
Faced with a softening dollar, U.S. investors tend to seek growth and earnings opportunities outside the country. This has shown some improving signs for the economy such as in India where the corporate earnings are responding positively.
Conclusion
We, at Edufund, believe that the dollar’s woes are expected to continue and Asia, including India, is setting itself for a constructive start to 2021.
Any positive development on the vaccine front is likely to encourage investors toward riskier assets while shying away from traditional havens.
Additionally, the fact that Democrats do not have Senate control may reduce the possibility of future stimulus thereby putting more pressure on the Fed to act aggressively for economic revival.
Thus, the currency is likely to depreciate over the longer term, due to less favorable U.S. interest rates relative to other G-10 currencies than in the past.
FAQs
What is the U.S. Dollar Index?
US Dollar Index is a barometer for the international value of the U.S. dollar and the world’s most recognized, publicly-traded currency index.
How does the central bank put money into the economy?
The Federal Reserve prints money and buys bonds equivalent to the money printed from financial institutions. This leads to a supply of currency in the economy, which is likely to drive down the interest rate (for borrowers), thereby putting an impetus on their consumption pattern.
What happens to the value of money if it is overprinted?
Overprinting can result in the devaluing of money and also cause inflation in the market.
