The domestic equity markets have outperformed the world markets as a direct consequence of a swift rise in the bellwether US Dollar Index since July 15 this year.

Both equity benchmarks--the Sensex of the Bombay Stock Exchange and the Nifty of the National Stock Exchange-- have gained 14 per cent and 12 per cent, respectively, as the USDX rose by a quick 7.83 per cent in over a month. It touched a high of 77.50 on August 26.

Compared to this, the benchmarks in Brazil and Russia, which are predominantly commodity exporters, have declined in the range of 10-21 per cent during the same period.

Only the equity benchmark of the FTSE 100 has gained by 4 per cent, while the benchmarks in Hong Kong and Japan declined marginally.

On the other hand, the benchmark index in China has fallen 15 per cent as metal and refining stocks have high weight in the index.

The USDX, which is exclusively traded on the Intercontinental Exchange platform, is a measure of the value of the US dollar relative to a basket of foreign currencies, including the Euro, Japanese yen, pound sterling, Canadian dollar, Swedish kroner and Swiss frank.

The index is a weighted geometric mean of the dollar's value compared to the six currencies.

The USDX touched a low of 71.33 on April 22, 2008, and traded in a narrow range for three months before it started making a quick move upwards since July 15.  

According to market analysts, hedge funds around the world have made USDX a benchmark to take positions in the commodity and equity markets. They buy in commodity and related stocks around the world when the dollar falls and reverse it when the dollar advances. This way they can hedge the currency risk exposure without any exposure to a single currency pair.

Samir Arora, fund manager at Helios Capital, said: "It is true that currently investor interest is moving towards commodity-consuming countries rather than those which export them. Also, there is unwinding of position in commodities as the dollar is rising."

According to Deepak Sawhney, head of research at Networth Stock Broking [Get Quote], a huge buying of dollar worldwide is one of the main reasons why commodity prices are falling.

"Currently, funds are betting big on a dollar rise and taking positions in equity which is benefited by it. This is the chief reason why the Indian markets are holding firm even while the other markets are falling as India is not a commodity-exporting country," he said.

This is evident from the fact that stocks of domestic information technology companies, the biggest beneficiaries of the rise in the dollar, underperformed the markets during the bull-run in the domestic equity markets which lasted from 2005-2008.

During this period, the USDX witnessed a bear phase and fell from the high of 92.33 in November 2005 to bottom out recently at 71.33 in April 2008. On the other hand, the rally in domestic markets was led by commodity related oil, metal and real estate stocks.

The IT index on the BSE, however, has now moved up sharply by 8.50 per cent since July 15. While both the metal and the oil & gas indices on the BSE have declined over 10 per cent in the past four months, which was a consolidation phase for the USDX since it touched a low in April this year.

ON TOP OF THE WORLD
Country/region	Index	7/15/2008	7/27/2008	% chg
India	SENSEX	12676.19	14296.79	12.78
India	NIFTY	3861.10	4292.10	11.16
UK	FTSE 100*	5171.90	5470.70	5.78
USA	DOW JONES*	10962.54	11412.90	4.11
Hong Kong	HANG SENG	21174.77	21464.72	1.37
Japan	NIKKEI 225	12754.56	12752.96	-0.01
Brazil	BOVESPA*	61015.09	54972.38	-9.90
China	SHANGHAI SE	2779.45	2342.15	-15.73
Russia	MICEX*	1629.28	1292.92	-20.64