Rupee weakens vs dollar as Fed official calls for faster tapering

NEW DELHI: The rupee weakened against the US dollar on Monday as talk of a faster pace of bond tapering by the Federal Reserve fuelled a global strengthening of the greenback, dealers said.

The partially convertible rupee opened at 74.3450 to a dollar on Monday, 0.15 per cent weaker than 74.2350 at the previous close. So far in the day, the domestic currency moved in a band of 74.3125-74.3625 against the greenback.

The US currency strengthened worldwide after US Federal Reserve Governor Christopher Waller urged the American central bank to step up on the scaling back of quantitative easing amid hardening inflation in the world’s largest economy.

Consumer inflation in the US surged to a 31-year high in October, jumping to 6.2 per cent on-year.

The data print intensified speculation of the Federal Reserve tightening monetary policy sooner than expected, leading to higher US government bond yields and a stronger dollar.

Higher interest rates in the world’s largest economy would likely reduce the appeal of emerging market currencies such as the Indian rupee.

The dollar index, which measures the greenback against six major currency rivals, broke past the psychologically significant level of 96 on Monday and was last at 96.11. The index was at 95.78 at 1615 IST on Thursday. The domestic currency market was shut on Friday for Guru Nanak Jayanti.

“The noise coming out from the Federal Reserve clearly suggests that they intend to tackle the inflation bull by the horns. Everyone was prepared for US policy normalization but if it happens sooner than expected then the ripples will definitely be felt in emerging markets,” a senior currency trader at a large private bank said on condition of anonymity.

“We are in a much better position when it comes to reserves but if there is a genuine global shift in fundamentals, then the RBI may not want to expend too much ammunition; it would just want to smoothen out volatility. So the bias for the rupee is one of depreciation,” he added.

While the signals emanating from the Fed cast a damper on local market sentiment, a sharp decline in global crude oil prices lent some support to the domestic currency, dealers said.

Crude oil prices fell to a seven-week low on Friday because of concerns of weak demand after COVID-19 cases registered an increase in Europe.

Crude oil for December delivery on the New York Mercantile Exchange plunged 3.7 per cent to close at $76.10 per barrel. Brent crude prices shed 2.9 per cent to close at $78.89 per barrel.

Easing crude oil prices bode well for both India’s current account and inflation as the country is the world’s third-largest consumer and importer of the commodity.

The decline in oil prices also buoyed sentiment in the sovereign bond market, with the yield on the 10-year benchmark 6.10 per cent 2031 paper last two basis points lower than the previous close at 6.33 per cent. Bond prices and yields move inversely.

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