Rupee Weakens Against A Subdued Dollar On Rising Inflation Expectations

The rupee opened lower against a restrained dollar early on Monday as August retail inflation data due later in the day was expected to show a surge back up to near 7 per cent.

Bloomberg showed the rupee was last at 79.6613 per dollar, compared to its previous close of 79.5838, after opening lower at 79.6387. 

PTI reported that the rupee fell 10 paise to 79.67 against the US dollar.

That even as the dollar was pressured by a more hawkish European Central Bank and louder voicing of intervention by Japanese officials.

A Reuters survey of economists showed retail inflation likely snapped a three-month downward trend in August as food prices surged, which may add pressure on the Reserve Bank of India to hike interest rates more aggressively in coming months.

Although rising inflation is a worldwide problem, it is particularly felt in countries like India where millions of people are living in extreme poverty.

"Markets now await India's August inflation data, which is likely to trend higher to 6.90 per cent from 6.71 per cent in July, as per a poll, adding pressure on RBI to hike interest rates more aggressively in coming months," Sriram Iyer, Senior Research Analyst at Reliance Securities, told PTI.

In the US, inflation is forecast to show a slowing a softer figure, hinting at a peak for inflation.

While those expectations pressured the dollar, strategists predict the dollar reign was not done yet.

After a month of steady rises, the dollar has currently encountered some profit-taking from a market that is highly long the currency. 

Reuters reported that BofA global economist Ethan Harris fears that by focusing on actual inflation to determining when to stop, central banks may go too far. The bank has lifted its target for the federal funds rate to a range of 4.0-4.25 per cent, with a 75bp hike in September and smaller rises thereafter.

"For investors, this means more pressure on interest rates, more weakness in risk assets and further upside for the super-strong dollar," said Mr Harris.

"In our view, these trends only turn when markets price the full fury of central bank hikes and we are not quite there yet," he added.

The dollar index was at 108.820 after rising as high as 110.790 the previous week.

A Reuters report showed, analysts at ANZ noted the dollar over the past month was up roughly 9 per cent against the euro and the Chinese yuan, 12 per cent against the British pound and 19 per cent against the yen.

"The rampant USD is causing strain in developing countries, which are finding imports priced in USD more expensive," they said in a note.

"With Fed speakers using every opportunity to hammer home a hawkish message and quantitative tightening looming, the USD is not about to dramatically turn."