The first indication of the impending turbulence in the equity market came from the currency markets. After remaining in a constant ratio mode for 15 years, the Japanese yen gained strength against the US dollar. This changed the whole equation and a large part of the funds, which were floating in the world equity and commodity markets, started to feel the effect as carry trade started to unravel. Since the interest rate in Japan was zero, a large number of hedge funds used to raise money from Japanese investors and its banks, deploying them in various assets classes world wide, including the Indian equity markets. The moment yen started gaining strength, investors began to withdraw funds to protect themselves from getting hit on currency accounts. This had a spiralling affect as hedge funds started to liquidate their holdings across the globe. The disturbance in dollaryen balance also had a negative impact on other crosscurrency relationships. This re-adjustment between dollar and yen is one of the main reasons for the large-scale losses, which several Indian companies incurred in 2008. Some of the established relationships between various currencies underwent a sea change. The pound sterling, which has always been gaining against the Indian rupee, weakened for the first time. While the readjustment between the dollar and the pound is one reason for this weakness, another major factor for the rupee becoming stronger against the pound is the wealth of the Indian diaspora. With a large number of banks in UK facing crisis of confidence, rich NRIs from UK remitted huge amount of pounds to Indian banks, thereby strengthening the rupee, In fact, the pound is the only major currency against which the rupee is quoting at a gain of more than 5 per cent, compared with the same time last year. Despite the dollar losing its sheen against major currencies of the world, because it was printed liberally, the rupee lost against the dollar because of the high fiscal deficit in India. The dollar is expected to remain weak against most other currencies for another year. It is only after the eco nomic recovery gains momentum in the US that we are going to see dollar regaining its position in the currency markets. (The reports on page 8&9 have been written by Rajiv Nagpal, a consulting editor of Financial Chronicle and director of an independent brokerage) rajivnagpal@mydigitalfc.com 6,763.29 March 2, 2009 AIG posts $61bn loss; uproar in US as firm pays $165m bonus to executives 7,776.18 March 29, 2009 GM’s Rick Wagoner asked to step down; firm told to preapare for bankruptcy 6,926.49 March 10, 2009 Dow rises 379 points in biggest gain in 2009 after Citibank’s profit forecast

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