In a dramatic turn of events for global markets, the Indian rupee has reached an all-time low against the US dollar, plummeting below the critical level of 87 on February 3, 2025. The main reason for this steep slide is the sharp rise in the dollar index post-US President Donald Trump’s recently announced tariff impositions. The ongoing war between the United States and China, Canada, and Mexico have created widespread uncertainties that have propagated ripples around international financial markets.
The dollar index and implications for the rupee
During early trading on February 3, 2025, a dollar index, measuring the strength of the US dollar relative to a basket of six large global currencies, shot up sharply. It jumped to 109.825 from 108.370 recorded during the previous trading session. This spurt in the dollar index reflects the increasing hegemony of the greenback in international trade and investment, primarily due to risk aversion following the new tariff announcements from President Trump.
As a result, the Indian rupee plunged to 87.1100 against the US dollar at the start of trading on February 3, setting a new record low for the currency. The rupee had closed the previous session at 86.6162 against the dollar. In a very short period of time, this currency has declined by a whopping amount. Sharp depreciation is one part of the bigger trend: most emerging market currencies are affected by the uncertainty created by the trade war, which is being led by the US, and also by the rising dominance of the US dollar.
Trump’s Tariffs: A New Shock to Global Trade
On January 31, 2025, US President Donald Trump declared he would impose hefty tariffs on imported goods from Mexico, Canada, and China, effective February 1, 2025. The tariff rates have been set at 25 percent on goods imported from Mexico and Canada and 10 percent on Chinese imports. The much-debated move is part of Trump’s broader “America First” trade policy, which has been added fuel to further strain an already fragile global economic environment.
The decision has sparked backlash from different quarters, with countries affected by the tariffs warning of retaliatory measures. China, the largest economy affected by these new tariffs, has already indicated that it will take reciprocal steps, which may escalate the trade dispute. The US’s aggressive trade stance has resulted in rising fears of an all-out trade war, prompting investors to flock to the US dollar as a safe-haven asset.
As the dollar strengthens, Indian rupee and other emerging market currencies are forced to go downward. Investors tend to move more capital away from riskier assets in developing economies and into the US dollar as the ultimate safe haven during heightened uncertainty.
Risk Aversion Rules Global Markets
As a response to the trade tariffs and the general risk environment, investors have been rebalancing their portfolios toward safer assets, including gold, the Swiss franc, and the Japanese yen. The rise in demand for the US dollar reflects this risk-averse attitude, as investors seek refuge in the world’s most widely used currency when market turbulence strikes.
The global equity markets have taken a hit, with many indices experiencing steep declines as the implications of Trump’s tariff policies ripple through the global economy. The Indian stock market has not been immune to this volatility, with the Sensex and Nifty both showing signs of stress. Apart from the rupee’s depreciation, the market has seen significant declines in key sectors, with investor sentiment taking a hit as uncertainty prevails.
Gold, which traditionally performs well in periods of economic uncertainty, has seen a surge in demand, as investors seek to hedge against the potential adverse effects of the tariffs on the global economy. Similarly, cryptocurrencies have witnessed increased volatility, with many digital assets experiencing sharp price fluctuations as investors grapple with the broader market instability.
The Indian Economy: Navigating Stormy Waters
The Indian economy, as all the emerging markets around the globe, is undergoing tremendous duress because of the imposition of tariffs made by Trump. A weakening rupee enhances the costs of imports on a huge scale because crude oil forms a large portion of energy consumption in India. Because oil prices are likely to rise, attributable to rupee devaluation, all kinds of inflationary pressure is going to build up further and continue to complicate India’s macroeconomic outlook.
Further, a depreciation in the value of the rupee will widen India’s current account deficit due to increasing costs of imports that the country is likely to struggle with its external obligations. Increased pressure on the currency through the higher current account deficit might lead to a worsening of the situation for the rupee.
There can be benefits also for the exports sector in the country with weaker rupee and cheaper goods in the world economy. Such reduction in cost benefits the export businesses in the sense that this shall help mitigate many of the above negative effects triggered by these unilateral tariffs to its economy. Therefore, a specific impact is highly uncertain due to the significant variability in dependence from global economies or the directions wherein the global trading war moves into the future.
The Global Trade War: What’s Next?
This series of protectionist measures increases significantly between the US and its major trading partners, such as China. The combination of all tariffs levied by President Trump on goods from China, Canada, and Mexico may have far-reaching implications, damaging supply chains and messing up all cross-border trade flows. China and other countries involved in the international trading system are sure to retaliate, thereby further complicating the present international trade environment.
The other country, China, has warned that it would retaliate by imposing additional retaliatory measures, as it is already facing sizeable tariffs by the US in the administration led by Trump. The Chinese government has stated it will impose levies on numerous US products across different sectors – from agriculture to technology. Global economy may eventually be pushed towards an even grimmer future ahead.
The ripple effects from the trade war are not only affecting the US and China but have also reached different parts of the globe. The dual challenge facing most developing countries, including India, is that they need to navigate the impact of the trade war while keeping their domestic economic growth on track. As globalization of markets has made it somewhat untranscendable, no country can be isolated from the fallout of such policy.
Frequently Asked Questions (FAQ)
Why did the Indian rupee fall to a record low against the US dollar?
The Indian rupee plunged to a record low against the US dollar, as the dollar index jumped sharply after US President Donald Trump unveiled new tariffs on imports from Mexico, Canada, and China. Global market uncertainty and risk aversion fueled demand for the US dollar, forcing it to depreciate the rupee and other emerging market currencies.
Impact of Tariffs by Trump on Global Markets
The imposition of tariffs by Trump in three main countries, specifically China, Mexico, and Canada, has significantly interrupted the free flow of global trade. Consequently, investor sentiments have turned risk-averse, leading to decline in global stock markets, appreciation of US dollars, and volatile prices in commodities such as gold and cryptocurrencies. The tariffs also hasten the aggravation of trade imbalances and inflationary tendencies across many countries.
Rising dollar index and its impact on emerging market currencies
Generally, the increase in the dollar index creates a downtrend for emerging market currencies. US-denominated assets are perceived to be safer when the economy is experiencing uncertain times, and it is during this time that investors divert capital into them. This results in capital inflow out of the emerging markets, increasing the perception that their currency depreciates-the Indian rupee being an example.
What impact may the decline in rupee have on the Indian economy?
The fall of the rupee could lead to higher import costs, especially for crude oil, exacerbating inflationary pressures in India. This could further widen India’s current account deficit and increase the cost of external debt. However, a weaker rupee could boost exports by making Indian goods and services cheaper for foreign buyers, which might provide some relief to the economy.
Will Trump’s trade war affect global supply chains?
Yes, Trump’s trade war is likely to disrupt the supply chain of most global supply chains connecting China and the US. With tariffs on goods traded between these two economic giants, production costs are likely to rise, and there will also be delays in the movement of goods. The wider ripples would then be felt across the world, since many countries find themselves integrated into these supply chains and would feel the knock-on impact of the tariffs.
The Indian rupee touching its lowest ever point and volatility in global markets have marked far-reaching impacts of President Trump’s trade policies. As the new war of trade continues to untangle, the silhouette of the global economic landscape remains ambiguous while markets stay on edge.
I am Aparna Sahu
Investment Specialist and Financial Writer
With 2 years of experience in the financial sector, Aparna brings a wealth of knowledge and insight to Investor Welcome. As an accomplished author and investment specialist, Aparna has a passion for demystifying complex financial concepts and empowering investors with actionable strategies. She has been featured in relevant publications, if any, and is dedicated to providing clear, evidence-based analysis that helps clients make informed investment decisions. Aparna holds a relevant degree or certification and is committed to staying ahead of market trends to deliver the most up-to-date advice.