The rupiah weakened sharply against the US dollar on Thursday as Federal Reserve officials said the US central bank would continue its strong rate hikes, prompting the greenback to appreciate globally .
A new record monthly trade deficit in July also added to the rupiah’s woes, causing the national currency to underperform against peers in emerging markets, traders said.
The national currency closed at 79.47 to the dollar from 79.16 to the dollar on Wednesday. Over the past two days, the rupee has lost 1% against the dollar, bringing the depreciation for 2022 as a whole to 6.5% so far.
The Rupee’s sharp decline against the US Dollar over the past two days has reversed much of the firm gains it had recently made. After hitting an all-time low of 80.06 per dollar on July 19, the local currency recorded a smart reversal, gaining as much as 1.9% to 78.50 per dollar on August 2.
“The Indian Rupee depreciated for a second day in a row and was the worst performing currency among the Asian baskets. It manages to pare some intraday losses on a likely intervention from the RBI to curb volatility as the currency hits a low. all-time high,” said HDFC Securities Research Analyst Dilip Parmar.
“The Fed’s continued ‘hawkish’ talk gave the dollar a bid against major currencies. The rupiah was under immense pressure after a record trade deficit and a weaker services PMI reading,” he said. .
A 50 basis point rate hike would be “a reasonable thing to do in September,” San Francisco Fed Chair Mary Daly said in an interview with Reuters on Wednesday.
The U.S. dollar index, which measures the currency against six major rival currencies, stood at 106.23 as of 3:30 p.m. from 106.09 at the same time on Wednesday.
Following recent weak economic data in the United States, speculation has been mounting globally that the Federal Reserve may adopt a slower pace of rate hikes to limit damage to economic growth.
Higher US interest rates generally drive foreign investment out of emerging markets such as India.
Traders said Thursday’s rupee weakness was exacerbated by technical positioning in the market. After the Rupee strengthened over the past few days, traders faced aggressive betting on the US Dollar, which bolstered the national currency.
From the July 26 close to August 2 settlement, the rupiah gained 1.4% against the dollar, outperforming most emerging market currencies.
However, with the rush in US dollar betting having now subsided, the rupee was moving in line with global fundamentals, traders said.
“The movement of the rupee (Thursday) is related to what happened last week and at the beginning of this week. Last week’s move was more of a shake-up of long buying (dollar betting) and unhedged exporting,” said Anindya Banerjee, vice president, foreign exchange and interest rate derivatives at Kotak Securities.
“Once that was done, I think what happened was the dollar index strengthened globally, the Indian rupee just caught up. It was plus a technical retreat, the positioning was excessively long, it had to be flushed out, ”he said.
Banerjee predicted that the Rupee would range between 79.10 and 79.75 to the US Dollar in the near term.