Rupee may dip to all-time low on Fed outlook-spurred dollar rally

The Indian rupee may slip to a lifetime low at open on Friday after the dollar index climbed to the highest in more than two years, building on its rally in the last quarter.

The 1-month non-deliverable forward indicated that the rupee will open at 85.80-85.82 to the US dollar, down from 85.7525 in the previous session and possibly past the all-time low of 85.8075 hit last Friday.

The dollar index rose 0.7 per cent on Thursday, hitting 109.54, helped by the US jobless claims data.

The index carried on the momentum of December, when it rallied 7.7 per cent, thanks to Donald Trump's election victory and the Federal Reserve slashing its forecasts of how many times it will cut interest rates this year.

"The dollar in the New Year is basically carrying from where it left in 2024. It looks like this dollar rally will not relent till at least the Trump inauguration," a currency trader at a bank said.

"I am a bit surprised that we did not see a bigger pop (on dollar/rupee)" considering the dollar's up move, he said.

The rupee's relatively mild decline could be because the 85.80 level has been defended quite forcefully by India's central bank, traders said.

On two occasions in the last week, the Reserve Bank of India sold dollars heavily near 85.80 to help out the rupee.

The local currency had a difficult time through a large part of December, requiring the central bank to intervene regularly to manage the pace of the decline.

Apart from the dollar's strength, India's wider trade deficit and slowing portfolio flows have dented demand for the rupee.