Rupee Weakens As Prospects Of An Aggressive Fed Hike Helped Dollar's Appeal

The rupee weakened significantly as expectations of an aggressive rate hike by the Federal Reserve helped dollar's appeal amid a deep sell-off in global risk assets as investors remained jittery.

Bloomberg showed the rupee was last at 79.8175 against the greenback, after opening at 79.7875, compared to previous session's close of 79.7563.

PTI reported that the domestic currency fell 8 paise to 79.82 against the US dollar in early trade.

"You get a sense that markets are just bidding time before deciding which side to lean on. That is understandable," a dealer at a Mumbai-based bank told Reuters.

"Obviously, the Fed decision today is a big event risk and one that could potentially shape the direction of rupee and other emerging market currencies for the next several weeks," the trader added.

In the previous session, the dollar index surged again above 110 as traders prepared for a hawkish Fed decision. Overnight, US stocks fell, and near-term maturity Treasury rates rose to new 15-year highs.

Later in the day, the Fed is predicted to raise interest rates by 75 basis points, and policymakers are forecast to become more hawkish. There is a nearly 20 per cent chance the US central bank will choose an even more drastic rate increase of 100 basis points.

Following the Fed's decision, the important question for the rupee will be whether it can remain resilient and maintain above the 80 mark. The Reserve Bank of India's (RBI) argument in favour of the 80 level might be put to the test once more, Reuters reported.

"For how long can Asian central banks, including RBI, defend FX and at what cost," Madhavi Arora, lead economist at Emkay Global Financial Services, told Reuters. "RBI's reaction function will depend on global financial disruption spillovers."