Rupee Weakens Sharply, Tracking A Sell-Off In Risk Assets After Fed Minutes

The rupee weakened sharply at the start on Thursday, tracking a sell-off in risk assets and as the dollar was on the front foot, a day after minutes from the Federal Reserve's July meeting pointed to rates staying higher for longer to bring down inflation.

At the interbank foreign exchange, the rupee opened at 79.60, then fell to 79.68, registering a decline of 23 paise over the last close, according to PTI.

On Wednesday, the rupee gained 29 paise to settle at 79.45 against the dollar.

Indian equity benchmarks started on the backfoot on Thursday, snapping a long winning streak after gloomy global cues pointed to more risk off trades.

But rupee's losses were limited by a fall in global crude prices.

Oil prices eased on Thursday, reversing course from the previous session, as rising output from Russia and worries about a potential global recession weighed on futures.

Brent crude futures fell 33 cents, or 0.4 per cent, to $93.32 a barrel. US crude futures fell 40 cents, or 0.5 per cent, to $87.71 a barrel.

Prices rose more than 1 per cent during the previous session, although Brent touched its lowest level since February.

Futures have fallen over the past few months, as investors have pored over economic data that has spurred concerns about a potential recession that could hurt energy demand.

"Higher dollar index is offset by lower oil prices keeping the rupee in a narrow range while 10-year bond yields of India have gained as oil prices fall," Anil Kumar Bhansali, Head of Treasury, Finrex Treasury Advisors, told PTI.

The upside on the rupee is likely capped, thanks to the "wall of demand for dollar at dips (on USD/INR)", a trader at a private sector bank, told Reuters. He pointed out that the dollar has this week received "very good support" at the 79.20-79.30 level.

The potential dollar outflows associated with a private equity deal that was announced earlier this week will be monitored by traders.

The dollar rose 0.6 per cent on the yen overnight and held at 134.90 yen on Thursday. The euro bought $1.0184. The US dollar index was steady at 106.570.

The greenback gained most against the Antipodeans, especially the Aussie. The New Zealand dollar also fell, losing nearly 1 per cent to unwind an initial jump after the central bank hiked interest rates and steepened its projected rate-hike track.

The greenback rose against the yen and sterling and was steady on the euro.

"The bigger picture for the dollar is that it's in a strong uptrend," said Matt Simpson, a senior analyst at brokerage City Index in Brisbane, adding it has now paused a weeks-long pullback

"In some ways, bulls are looking to step back in and I think the Fed minutes gave them a reason to do so."

Federal Reserve officials saw "little evidence" late last month that US inflation pressures were easing, the minutes showed. The minutes flagged an eventual slowdown in the pace of hikes, but not a switch to cuts in 2023 that traders until recently had priced in to interest-rate futures.

"Once a sufficiently restrictive level has been reached, they are going to stick to that level for some time," Rabobank strategist Philip Marey said in a note to clients.

"This clearly stands in contrast to the early Fed pivot that the markets have been pricing in."

Traders predict that there is a 36 per cent chance the Fed will raise interest rates by 75 basis points for the third time in a row in September. They also predict that rates will peak in March at roughly 3.7 per cent and then remain there through the end of 2023.

Sterling also slid overnight after double-digit inflation focused investors' concerns on recession risk.

Britain's consumer price inflation rose to 10.1 per cent in July, its highest since February 1982, official figures showed and after a brief blip higher sterling fell 0.4 per cent to $1.2050.