Rupee logs best single-day gain in 4 years as Fed hikes seen slowing

As dollar index breaches key technical levels, outlook on rupee improves

The rupee surged against the US dollar on Friday, registering its sharpest single-day gain in nearly four years, as a lower-than-expected US inflation print led to hopes of the Federal Reserve slowing the pace of monetary tightening.

The rupee settled at 80.81 on Friday, exactly 100 paise stronger than the previous close of 81.81 versus the dollar. This was the biggest single-day gain in the rupee since December 18, 2018, the Bloomberg data showed. The rupee’s closing level on Friday was also the strongest since September 21, 2022, the data showed.

So far in 2022, the rupee has depreciated 8 per cent against the greenback.

With US inflation, which has stubbornly hovered near 40-year highs for many months, finally showing signs of easing, traders were of the view that the Fed might ease up on future rate hikes. The Fed has hiked rates by 375 bps since March, with the last four increases being 75 bps each.

Higher US interest rates prompt global funds to flow to the world’s largest economy, leading to a stronger dollar. This exerts pressure on emerging market currencies such as the rupee.

“October inflation downward surprise provides a long-overdue and welcome signal that price pressures could be starting to cool. With core CPI also finally showing downward momentum, the ‘Powell pivot’ is in play – the probability of a 50 bps (Fed) hike in December has shot up to 81 per cent from 57 per cent yesterday,” Madhavi Arora, lead economist at Emkay Global Financial Services, said.

The US data caused the greenback to weaken sharply, with the dollar index at 107.32 at 3:30 pm IST. The index was 110.93 at the same time on Thursday.

“We had seen a peak of 114-115 on the dollar index and, in fact, the market was worried that it could even touch 119-120. That was the peak of bearishness. Now that the dollar index has materially come off, that means the pressure from the dollar side is over,” Nitin Agarwal, head of trading at ANZ Bank, told Business Standard.

IFA Global CEO Abhishek Goenka sees the rupee heading to the 80-per-dollar mark in the coming days, while Finrex Treasury Advisors predicted a range of 80.20-81.50 per dollar.

The softening in the dollar index has provided relief to the rupee after a couple of months of heightened volatility. For the month starting September 21, the rupee had weakened 4 per cent against the dollar, touching a lifetime low of 83.29 on October 20.

“The next technical level that people are talking about for the dollar index is 105-106. The range that people are seeing is 105 to 109 for now. If that were to happen, then of course the dark clouds may have lifted for now,” ANZ Bank’s Agarwal said.