Indian rupee slips as Fed rate expectations boost dollar, dent global stocks

MUMBAI: The Indian rupee ended modestly weaker on Tuesday as a churn in U.S. rate expectations boosted the dollar to a one-year peak against a basket of peers, driving global equities lower and pressuring Asian currencies.

The Indian rupee closed at 94.7350 per dollar, down 0.1% from its close at 94.6775 in the previous session.

Indian stocks fell 1.1%, tracking a more than 3% slide in MSCI’s gauge of Asian shares, as rising bets on Federal Reserve rate hikes this year dented equities from Tokyo to New York.

The dollar index rose to 101.18, its highest level since May 25, weighing on regional currencies, which were down between 0.1% and 0.6%. Money markets are close to fully pricing in a U.S. rate increase by September.

“The adjustment higher in US yields is creating a more challenging backdrop for risk assets,” MUFG said in a note. The interest rate expectations-sensitive 2-year U.S. Treasury yield has risen 18 bps so far in June and was last at 4.19%.

The shift in expectations is presenting a fresh headwind for the rupee shortly after it found relief from the ripple effects of the Iran war, as policymakers stepped up support and oil prices cooled on signs of progress in peace negotiations.

The United States has waived sanctions on Iran for 60 days starting Monday after the first talks under a nascent peace deal, with President Donald Trump saying he will “do what I have to do” if Iran does not stick to its side of the agreement.

Traders expect the rupee to face intermittent pressure going ahead even as expectations of dollar inflows - via overseas FX deposits, borrowings and debt investments - keep the depreciation bias in check.

Importers continue to be more active than exporters in hedging activity, a pattern that is unlikely to shift in the near term, a trader at a private bank said.