Rupee weakens 1% in two days as renewed talks of 'hawkish' Fed boost dollar

Record high trade deficit, technical factors add to woes

The rupee weakened sharply against the US dollar on Thursday as Federal Reserve officials said the US central bank would continue with steep rate increases, prompting the greenback to gain globally.

A fresh record monthly trade deficit in July also added to the rupee’s woes, causing the domestic currency to underperform its emerging market peer currencies, traders said.

The domestic currency closed at 79.47 per dollar as against 79.16 to a dollar on Wednesday. Over the past couple of days, the rupee has shed 1 per cent against the dollar, taking the depreciation for 2022 as a whole so far to 6.5 per cent.

The rupee’s sharp slide against the US dollar over the past couple of days has unwound a hefty part of the firm gains that it had recently notched up. After weakening to a lifetime low of 80.06 per dollar on July 19, the local currency scripted a smart turnaround, gaining as much as 1.9 per cent to 78.50 per dollar on August 2.

“The Indian rupee depreciated for a second straight day in a row and was the worst-performing currency among Asian baskets. It manages to pare some intraday losses on probable RBI intervention to curb the volatility as the currency reaches near a record low,” HDFC Securities Research Analyst Dilip Parmar said.

“The continued “hawkish” Fed chat gave the dollar a bid against major currencies. The rupee was under immense pressure after a record high trade deficit number and lower reading of service PMI,” he said.

A 50-basis-point rate hike would be “a reasonable thing to do in September”, said San Francisco Fed President Mary Daly in an interview to Reuters on Wednesday.

The US dollar index, which measures the currency against six major rival currencies, was 106.23 at 3:30 PM against 106.09 the same time on Wednesday.

Following recent weak economic data in the US, speculation had built up globally that the Federal Reserve may adopt a slower pace of rate hikes to rein in damage to economic growth. 

Higher US interest rates typically lead to outflows of overseas investment from emerging markets such as India. 

Traders said the rupee’s weakness on Thursday had been exacerbated by technical positioning in the market. After the rupee strengthened over the past few days, traders squared off aggressive bets on the US dollar and that bolstered the domestic currency.

From closing on July 26 to the settlement on August 2, the rupee gained 1.4 per cent versus the dollar, outperforming most emerging market currencies.

However, with the rush to square off bets on the US dollar now having abated, the rupee was moving in line with global fundamentals, traders said.

“The rupee’s move (on Thursday) is connected with what happened last week and the early part of this week. Last week’s move was more of a shakeout of the longs (bets on the dollar) and unhedged exports,” said Anindya Banerjee, vice-president, currency derivatives & interest rate derivatives at Kotak Securities.

“Once that has been done, I think what has happened is as the dollar index has strengthened globally, the Indian rupee has simply played catch-up. This was more of a technical pullback, the positioning was excessively long, that had to be flushed out,” he said.

Banerjee predicted the rupee in a range of 79.10-79.75 per US dollar over the near term.