MUMBAI: The Indian rupee swung sharply before ending lower on Tuesday as the possibility of rising tensions between India and Pakistan remained front and centre for traders, pushing the currency's near-dated implied volatility to an over two-year high.
The rupee jumped out of the blocks to touch its year-to-date high of 84.95 per U.S. dollar before swinging to its day's low of 85.3875. It ended down 0.3% at 85.2625.
In contrast, its regional peers were hoisted by hopes of softening global trade tensions. China's yuan strengthened to a one-month high, while the Malaysian ringgit was up nearly 1%.
Indian rupee to weaken after Pakistan official’s comments heighten cross-border risks
Nervousness over heightened tensions between New Delhi and Islamabad after a deadly militant attack on tourists in Kashmir last week kept the rupee under pressure though, with traders reacting to unverified news reports of military operations.
More than half of the tourist destinations in the insurgency-torn Kashmir region have been closed to the public from Tuesday, per a government order.
"No one knows how it (USD/INR) will behave. So, better to reduce risk," a Singapore-based currency trader at a bank said.
The jitters have also pushed up the rupee's 1-month implied volatility to 5.5%, its highest since March 2023.
While sentiment is slightly positive for the rupee given the pick up in portfolio inflows, geopolitical flare-ups remain a risk for the currency, said Dilip Parmar, a forex research analyst at HDFC Securities.
If the tensions escalate, Parmar reckons the rupee will head towards 85.70.
Meanwhile, the dollar index was up 0.2% at 99.2, with investors keeping a keen eye on the slew of U.S. economic data due this week.
"A week full of data releases may offer multiple opportunities to re-enter dollar shorts after some positioning rebalancing last week," ING Bank said in a note.
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