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Rupee falls as Fed officials reiterate US rate hike path, dollar gains

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The rupee weakened sharply against the US dollar on Thursday as Federal Reserve officials said the US central bank was on track to continue with steep rate increases, prompting the greenback to gain globally.

The rupee was trading at 79.45 per dollar 10.10am in India, compared to the previous close of 79.16 per on Tuesday.

A 50-basis-point rate hike would be “a reasonable thing to do in September”, said San Francisco Fed President Mary Daly in an interview to Reuters on Wednesday. “If we just see inflation roaring ahead undauntedly, the labor market showing no signs of slowing, then we’ll be in a different position where a 75-basis-point increase might be more appropriate. But I go in with the 50 in mind as I look at the data coming in.”

The US dollar index, which measures the currency against six major rival currencies, was last at 106.41 as against 106.09 at 3:30 pm IST on Wednesday.

Following recent weak economic data in the US, speculation had built up globally that the Federal Reserve may adopt a slower pace of rate hikes to rein in damage to economic growth.

The Federal Reserve announced a 75-basis-point rate hike in July, taking the total tally of rate increases to 225 bps so far in 2022. Higher US interest rates typically lead to outflows of overseas investment from emerging markets such as India.

Traders said that the rupee’s weakness on Thursday had been exacerbated by technical positioning in the market. After the rupee strengthened over the past few days, traders squared off aggressive bets on the US dollar to and that bolstered the domestic currency.

From July 26 to August 2, the rupee gained 1.4 per cent versus the dollar, outperforming most emerging market currencies.

However, with the rush to square off bets on the US dollar now having abated, the rupee was moving in line with global fundamentals, traders said.

“The rupee’s move (on Thursday) is connected with what happened last week and the early part of this week. Last week’s move was more of a shakeout of the longs (bets on the dollar) and unhedged exports,” said Anindya Banerjee, vice president, Currency Derivatives & Interest Rate Derivatives at Kotak Securities.

“Once that has been done, I think what has happened is as the dollar index has strengthened globally, the Indian rupee has simply played catch-up. This was more of a technical pullback, the positioning was excessively long, that had to be flushed out,” he said.

Banerjee predicted the rupee in a range of 79.10-79.75 per US dollar over the near term.

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