NEW DELHI: The rupee weakened against the US dollar on Wednesday due to the strengthening of the greenback as a surge in inflation in the US intensified concerns of higher interest rates in the world’s largest economy, dealers said.

The domestic currency opened at 74.50 per US dollar on Wednesday as against the previous close of 74.37 and was last at 74.45 against the greenback. So far in the day, the partially convertible currency moved in a band of 74.45-74.50 per dollar.

The dollar index, which measures the strength of the greenback against six major currency pairs, broke past the psychologically significant 96 level on Wednesday and was last at 96.05. At the end of the previous week, the index was at 95.12.

Consumer Price inflation in the US rose to an over 30-year high of 6.2 per cent in October causing yields on US Treasury notes to harden in anticipation of the Federal Reserve tightening monetary policy sooner rather than later.

The yield on the 10-year US Treasury note was last at 1.64 per cent, one basis point higher than the previous close and seven basis points higher so far in the month.

Higher US Treasury yields typically reduce the appeal of emerging market currencies such as the Indian rupee.

“Yesterday, the rupee was spared too much damage because of overseas flows for investment in domestic companies, but the way US inflation and US yields have risen is a very major concern for us,” a dealer with a state-owned bank said on condition of anonymity.

“The view now is that apart from tapering bond purchases, the Fed will definitely hike interest rates by July. This will accordingly put pressure on the Reserve Bank of India to tighten its monetary policy,” the dealer said.

Even as the view on US interest rates was clouding sentiment for the rupee, dealers said that they did not expect the domestic currency to weaken much past the psychologically significant 74.50/$1 mark as exporters were expected to step in at that level and sell dollars.

Government bonds also weakened marginally owing to the rise in US Treasury yields, with the yield on the domestic 10-year benchmark 6.10 per cent 2031 paper last trading 1 basis point higher from the previous close at 6.37 per cent.

Bond yields and prices move inversely.

Dealers now look for support from the RBI to keep the yield on the 10-year benchmark paper from rising above the crucial 6.40 per cent level.

“It depends on what the RBI’s aim is. Governor Das did say recently that the central bank is not looking to manage yields in exactly the same way as last year, so it depends on whether RBI is comfortable with letting it go towards 6.4-6.50 per cent or whether that is the new line in the sand,” a dealer with a large foreign bank said on condition of anonymity.

By admin

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