Indian rupee seen weaker as Fed rate hike prospects strengthen dollar

MUMBAI — The Indian rupee is expected to open lower against the U.S. currency on Friday after the dollar index reached a one-month high following comments from U.S. Federal Reserve officials over the quantum of rate hikes.

The rupee is tipped to open around 79.75 per U.S. dollar in initial trades compared with 79.6725 in the previous session.

The dollar index on Friday reached 107.72, the highest level since July 18, adding to the previous session’s 0.8% advance. The 2-year Treasury yield was hovering above 3.20%.

Traders assessed comments by Fed officials that once again seemed to signal that the U.S. central bank was unlikely to make a dovish pivot. One Fed official backed a third straight 75 basis points rate (bps) hike and another reckoned that a 50 bps or 75 bps rate hike would be reasonable at next month’s meeting.

While odds of a 75 bps rate hike at the September meeting have softened a bit following the July U.S. inflation data, Fed fund futures showed there is still a 40% probability that the central bank will hike rates by 0.75 percentage points.

“Markets.. find that the dovish Fed being hoped for is still a long time away,” Srinivas Puni, managing director at QuantArt Market Solutions, said.

The dollar index is now up almost 3% from the lows witnessed following the U.S. inflation data. Treasury yields too are now at or above levels prior to the inflation data amid broad push back from Fed officials against expectations that the pace of rate hikes is likely to slow.

The offshore Chinese yuan dropped 0.3% to 6.82 to the dollar on Friday, leading Asian currencies lower. The Chinese currency has come under pressure on concerns over the nation’s economic outlook.

“Further, concerns about the Chinese situation have been playing on Asian currencies and disadvantaging the rupee,” Puni said.

The rebound in oil prices is likely to add to rupee’s woes in Friday’s session. Brent crude futures climbed 3% on Thursday.

KEY INDICATORS: ** One-month non-deliverable rupee forward at 79.96; onshore one-month forward premium at 21 paise ** USD/INR NSE August futures closed on Thursday at 79.68 ** USD/INR forward premium as of Aug. 18 for end current month is 4.5 paise ** Dollar index up at 107.61 ** Brent crude futures down 0.2% at $96.4 per barrel ** Ten-year U.S. note yield at 2.9%, India 10-yr bond yield at 7.2421% ** SGX Nifty nearest-month futures down 0.2% at 17,970 ** As per NSDL data, foreign investors bought a net $542.4mln worth of Indian shares on Aug. 16 and Aug. 17 ** NSDL data shows foreign investors bought a net $1.7mln worth of Indian bonds on Aug. 17 (Reporting by Nimesh Vora; Editing by Neha Arora)