Reportedly, Israel and Hezbollah (Lebanon) have successfully negotiated a 60 days ceasefire to the latest round of hostilities which started with Israeli forces invading Lebanon on the 1st October 2024. The deal involves withdrawal of Israeli troops from Lebanon and deployment of a UN peacekeeping mission and establishment of a US led international monitoring group.
This is an important development in global geopolitics. The Hezbollah group was overtly supported by the Iranian government. Israeli invasion into Lebanon had evoked a direct military response from Iran; threatening a much wider escalation of a hitherto localized Israel-Palestine conflict. The ceasefire deal, which has been welcomed by Iran, diminishes the probability of an immediate wider escalation of the Israel-Palestine conflict. However, since the deal does not cover the ongoing Israeli attacks in Gaza Strip, it does not offer any durable mitigation of the threat.
If the outgoing president Biden could pursue Ukrainian president Zelensky to also negotiate a similar ceasefire deal with Russia, it would be considered a great parting gift for the president-elect Trump.
From the economics viewpoint, presence of the UN peacekeepers on the ground and direct involvement of the US in the region may temporarily help in restoring normalcy in the Red Sea marine traffic, thus normalizing the global trade to a certain extent; and the volatility in oil prices may also subside. A restrained approach from both sides would provide a durable solution.
This is definitely good news for India. An uncertain and volatile oil price environment, higher logistic cost due to disruption in the Red Sea, and a conflict involving Israel (supported by the US) and Iran (supported by Russia and China) are investors and policymakers’ nightmares.
Another thing that may be of immense interest to the Indian investors presently is Scott Bessent’s (Trump’s designated treasury secretary) views on USD and US treasury yields. As a hedge fund manager, Scott has preferred a weaker USD strategy, against raising tariff barriers, for the US manufacturing renaissance. Scott believes “tariffs are inflationary and in turn would strengthen USD. On the other hand, a weaker USD would make US manufacturing competitive. A weak dollar and plentiful, cheap energy could power a boom. A stronger USD should emerge only at a later stage if the US reshoring effort is successful”.
It may not be great news for the global hedge fund managers who are overwhelmingly long USD. As per the recent survey, presently, long USD is the most crowded trade globally.
If Scott sticks to his extant views, we may see USD weakening, US yields falling and US energy production & exports rising in 2025. This trifecta may delight Indian markets and our emerging market peers.
One question that begs the answer is “against what USD will weaken?” The US Fed is not keen to cut rates materially from the current levels. EUR cannot afford any strength, especially when German and French economies are tethering. Both China and Japan have shown no inclination to leave their currencies to the market forces. Strength in emerging currencies, including INR, is like a tiny insect bite for an elephant like USD; makes no difference. A peaceful middle east and Europe and cheap energy may take much of the shine out of gold.
I would be pleased to hear the views of readers on what would USD weaken against, if it does?
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