USD/INR: Rupee Extends Gains to Third Day Amid Subdued Dollar, Gains 14 Paise In Early Trade

The Indian rupee strengthened for the third straight session, appreciating by over 14 paise against the U.S. dollar in early trade Tuesday as the greenback softened ahead of the release of key U.S. inflation data.

The dollar to rupee conversion today fell to 74.425 against the U.S. currency, down from Monday’s close of 74.57. The rupee has lost over 170 paise in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened about 10 paise so far in this month.

“The rupee traded flat in the first half. However, it depreciated almost 13 paise in the second half and ended near 74.75 levels. The dollar on Monday posted moderate gains on weakness in EUR/US$ and strength in US$/JPY. EUR/US$ fell after ECB President Lagarde signaled the ECB may begin fresh stimulus measures next year after its PEPP program expires,” noted analysts at ICICI Direct.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.05% lower at 92.216, edging lower as weak U.S. data and a fresh surge in COVID-19 cases worldwide has sparked concerns that the nascent economic recovery is already running out of steam.

Investors are now looking ahead to U.S. inflation data for June on Tuesday and Fed Chairman Jerome Powell’s testimony before the Senate Banking Committee on Wednesday.

The world’s dominant reserve currency, the USD, is expected to rise further over the coming year, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to INR pair higher.

“Having been bearish on the dollar since April 2020, this month we feel compelled to outline a more positive medium-term scenario. At the heart of this is the likelihood that the Fed’s exit sequence from ultra-loose monetary policy is more compressed than they would have us believe. ING now sees the first hike in 3Q22,” noted analysts at ING.

“2Q22 is when the dollar should be rallying more broadly – coinciding with some decisive bearish flattening in the US yield curve.”

It is worth noting that sustained foreign fund outflows, higher oil prices, and firm U.S. dollar will continue to weigh on the rupee.

Global oil benchmark Brent futures traded 0.27% higher at $75.36 per barrel at the time of writing. Last week, oil prices spiked to a three-year high of $77.84 per barrel as OPEC+ failed to reach an agreement. Higher oil prices would push up the inflation expectations and widen India’s trade deficit, which could hurt the Indian rupee.

The benchmark equity indices BSE Sensex was trading 257 points or 0.49% higher at 52,626.71, while the broader NSE Nifty advanced 74.45 points or 0.47% at 15,766.10. Foreign institutional investors were net sellers in the capital market on Friday as they offloaded shares worth Rs 745.97 crore, as per exchange data.