Experts see Re weakening on Euro zone woes

The rupee, which touched a fresh low last week, is expected to stay under pressure in the near term, as concerns from the debt-ridden Euro zone continue to drive away foreign investors to safe haven currencies like the dollar and yen.

With depreciation of 6.4 per cent against the dollar, the Indian currency was the worst performer among Asian currencies in May. On Friday, the rupee closed at 55.59, thereby registering its eighth consecutive weekly loss against the greenback. During the week, it fell to a fresh all-time low of 56.52 per dollar. Market participants said given the weak domestic fundamentals and global headwinds, the rupee might again fall below 56 in the near term.

“Market forces are strongly in favour of the dollar; not ruling out an extended rally in the dollar index into 85.25-85.50 and euro spot into 1.20-1.18 before a sharp reversal tracking build-up of roll out of QE3,” said Moses Harding, head (ALCO and Market & Economic research), IndusInd Bank.

Spain was downgraded for the third time in less than a month by credit rating agencies, adding concerns to the health of the banking system in the region. This led to an increase in demand for dollar as investors sought safety. Last week, foreign institutional investors pulled out Rs 547 crore worth of investments from Indian equity and debt markets. Offshore investors have been net sellers in the Indian markets in the first two months of the current financial year. The dollar index against six major currencies hit a fresh nine-month high level last week before easing towards the end of the week. On the other hand, the euro suffered, falling to an 11-month low in the same period.

“On the last two trading days of the week, the rupee witnessed some recovery against the dollar, despite poor economic data, continued weakness in the euro and strengthening dollar index. This indicates the market might see a correction in the rupee very soon, provided it sustains below 56 for the next two to three sessions,” said India Forex Advisors, in a note.