A weaker Dollar?

Gold prices rose on Friday, on track for their second consecutive weekly gain, with a boost from a drop in the U.S. dollar and bets the U.S. Federal Reserve might soon end its interest rate-hiking cycle. Typically when US interest rates are likely to drop gold prices do harden however this asset allocation into gold by international investors is more a reaction to hold value against a depreciating dollar.

These however are tactical movements and not structural as the demise of the dollar has as always been slightly exaggerated. Indian buyers, only the second largest in the world after China hold yellow metal for entirely different reasons and the recent festival season showed the precious commodity in good light. However it still will be a personal choice for an investor as holding physical gold and the associated issues become onerous as opposed to the ease of a gold bond if serious allocation has to be thought of.

What does a weaker US dollar mean for the broader markets?

With the US federal reserve signalling a pause if not a cut in rates yet, the dollar will weaken against the major currencies in the world. This will shift focus to global markets as well as emerging markets as an asset of choice for global allocators. Export oriented US Stocks will also be in focus as most of the major US technology stocks are a favourite on the back of a weaker dollar spurring overseas sales and profits thereof. A weaker dollar however is seen as inflationary to the US as commodity prices appear dearer to US consumers. However the impact will still be slower in the coming months

Indian earnings remain robust

While the prospect of a slowly unwinding US interest rate regime appears to send good signals for the bond market the situation is far from clear. India will continue to attract attention of global investors if US rates continue to stay flat or start to reduce. Added to the relative attractiveness, Indian corporate earnings have remained robust. Second quarter earnings across most sectors have been positive and especially financials have come through with flying colours.

There are some concerns around unsecured lending in the Indian banking system but these seem early signs and may not be cause for immediate alarm. Given this situation corporate lenders and especially public sector banks appear attractive relative to their more aggressive private peers.

Investors should look at fundamentals closely before making any sectoral bets and remain diversified across the range of sectors available to them