The US dollar has declined to a three-year low after falling close to 10% in 2017 against a basket of currencies. This has surprised most analysts as the dollar was widely expected to gain on the back of rate hikes and normalization of its balance sheet by the Federal Reserve. Multiple factors are now said to be responsible for dollar depreciation.

Capital is moving out of the US to take advantage of broadening global growth and the expectation that other large central banks will also start unwinding monetary policy accommodation. Further, tax cuts in the US and their impact on the fiscal deficit are also affecting the value of the dollar. Dollar weakness is expected to continue in the near term.

Why is this important for India? First, emerging market economies such as India will continue to witness higher capital flows. Second, crude prices and the dollar tend to move in opposite directions. The situation will warrant careful management. Higher capital flows, leading to overvaluation of the rupee, and higher crude prices can significantly widen the current account deficit.

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