Rupee weakens to 2-1/2 month low; key support to be tested

By Swati Bhat

MUMBAI (Reuters) - The rupee weakened to its lowest level in 2-1/2 months on Monday, weighed down by heavy demand for the greenback from gold and oil importers along with choppy domestic shares.

Sentiment remained weak after Standard & Poor's reiterated its negative outlook on India's credit rating on Friday, which is one notch above "junk", warning of the need to follow through on reforms and dealing a blow to a government that had recently pitched for an upgrade.

Traders said the dollar's losses versus some major currencies however limited the local unit from falling too sharply. The movement of the greenback is expected to influence trading for the rupee in the week ahead.

"The rupee weakened because of gold, oil bids," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.

"Longs got unwound at lower levels ahead of the Bernanke speech. I expect the pair to move in a 54.40 to 55.50 range during the week," he added.

The partially convertible rupee closed at 55.10/11 per dollar compared to 54.88/89 on Friday. The rupee dropped to as much as 55.1350, its lowest since March 4.

Traders said the rupee has very strong support at 55.15 levels, a break of which can push it down to 55.50 levels.

The yen lifted off a 4-1/2-year low against the dollar on Monday after Japan's economy minister suggested the currency might have weakened enough, prompting some investors to pare bets against it.

Traders said choppy domestic shares also hurt sentiment. Shares snapped a four-day winning streak, retreating from 2-1/2-year highs as investors booked profits in rate-sensitive stocks after recent gains.

In the offshore non-deliverable forwards, the one-month contract was at 55.39 while the three-month was at 55.87.

In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.18 with a total traded volume of $4.36 billion.

(Editing by Sunil Nair)