Rupee slides as Federal Reserve's Powell hints at higher US terminal rates

The rupee weakened sharply against the US dollar in early trade Wednesday after comments by Federal Reserve Chair Jerome Powell suggested that the central bank would tighten monetary policy to a greater extent than earlier anticipated.

With the US dollar index surging to a three-month high following Powell’s comments, emerging market currencies including the rupee, took a beating versus the greenback.

At 09:40 am IST, the rupee was trading at 82.20 per US dollar as against 81.92 per US dollar at previous close. The Indian currency market was shut on Tuesday for Holi.

While delivering his semi-annual testimony before the Senate Banking Committee on Tuesday, Powell said that latest US economic data was stronger than expected, suggesting that the final level of interest rates would likely be higher than previously expected.

In a bid to bring down high inflation, the Fed has, since March 2022, hiked interest rates by 450 basis points, marking its most aggressive tightening cycle in around four decades.

Higher US interest rates prompt global investors to flock to the world’s largest economy, thus leading to strength in the dollar. The dollar index, which measures the currency against six rivals, was last at 105.79 as against 104.60 at 3:30 pm IST on Monday.

“The traders are now anticipating an almost 70% chance of a 50-basis point rate hike in March, up from 22% seen earlier yesterday, and now pricing for the rate to peak at 5.64% in September,” CR Forex Advisors MD Amit Pabari said.

“Traders (now) have a laser focus on Friday's employment report which shall certainly give clues on whether January's blockbuster report was a one-off spike or part of a more sustained trend. If the trend remains higher, the DXY (US dollar index) could march toward the 106.80-107 zone,” he said.

Dealers said that the Reserve Bank of India was likely to step in and curb volatility in the rupee through dollar sales around the 82.45-82.50 per dollar level.

“US Fed Chairman Jerome Powell strikes an uber-hawkish tone in his testimony to Congress pushing DXY above yearly highs. For USDINR, 81.80 acts as a support while 82.36 (last Friday's high) first resistance to watch out followed by 82.55,” Kunal Sodhani, Shinhan Bank vice-president (Global Trading Centre) said.

According to a dealer with a state-owned bank, the rupee is seen in a range of 81.90-82.50 per dollar for the rest of the day.