Rupee weakens as dollar near 16-month highs; Fed minutes strike hawkish note

NEW DELHI: The rupee weakened as much as 0.2 per cent against the US dollar in early trade Thursday as upbeat data in the world’s largest economy coupled with hawkish statements by Federal Reserve officials led to global strengthening of the greenback, dealers said.

The partially convertible rupee opened at 74.5450 per US dollar as against 74.3950 at close on Wednesday. So far in the day, the Indian currency moved in a band of 74.5225-74.550 per US dollar.

The dollar index, which measures the greenback against six major rival currencies, touched a 16-month high of 96.938 on Wednesday. The index, which was at 96.06 at the end of the previous week, was last at 96.74.

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Minutes of the Fed’s latest policy meeting showed that several members of the US rate-setting committee were in favor of speeding up the process of rollback of quantitative easing and possibly raising interest rates sooner than later amid surging inflation in the country. The minutes were released after trading hours on Wednesday.

Higher US interest rates, which typically lead to a hardening of US bond yields, reduce the appeal of emerging market currencies such as the rupee, potentially leading to outflows of overseas investment.

While the fall in the domestic currency was cushioned by a decline in global crude oil prices, most currency dealers were of the view that the bias for the rupee would continue to be one of depreciation and that the local unit could head towards the 75 per dollar level in coming weeks.

US WTI crude futures fell 9 cents, or 0.1 per cent, to $78.30 a barrel, extending an 11 cent loss on Wednesday. Brent crude futures slipped 5 cents to $82.20 a barrel, after losing 6 cents on Wednesday. Easing crude oil prices bode well for India’s trade deficit and inflation as the country is the world’s third largest importer of the commodity.

“Oil may have declined and we still expect overseas flows for Indian IPOs (Initial Public Offerings) but it is impossible to ignore the signs from the Fed,” a dealer with a state-owned bank said on condition of anonymity.

“The minutes clearly show that Fed officials are very concerned about inflation and that (US) rate hikes could happen sooner than expected. While the Reserve Bank of India has a strong FX warchest, there will still be ripples felt in EM currencies if the Fed were to move faster than expected,” he said.

Government bonds were steady as traders stayed on the sidelines ahead of a primary auction of sovereign debt worth Rs 24,000 crore on Friday, dealers said.

Yield on the 10-year benchmark 6.10 per cent 2031 paper was unchanged from previous close at 6.37 per cent. Bond yields and prices move inversely.

Dealers said that barring global developments, sovereign bonds were likely to remain in a tight band ahead of the RBI’s policy statement on December 8. Speculation is rife that the central bank could hike the reverse repo rate and narrow the width of the Liquidity Adjustment Facility corridor.

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