US Fed hawkish views on rate hike, rupee dips

The US Federal Reserve members strengthened anticipation that the American central bank will continue to hike rates at a faster pace, as the bank weakened sharply against the to hit a fresh low.

The index was up to fresh 20 year highs due to the expectation of a longer US monetary tightening cycle as global funds made their way to the world's largest economy.

In opening trades on Wednesday, the weakened to a new low of 81.94 per. The domestic currency, which had settled at 81.58 per dollar on Tuesday, has lost 2.4 per cent against the dollar since the Fed announced a 75 bps rate hike on September 21. The dollar has gone up by 9.2 per cent against the dollar in the past 2022, and has been around 9.2 per cent so far in 2022.

The rupee was trading at 81.85 per dollar at 10: 20 am IST.

On Tuesday, St Louise Fed President James Bullard said that the US had a serious inflation problem and that the credibility of the US inflation targeting regime may be at risk. Since March 2022, the Fed has hiked interest rates by 300 basis points to tackle 40 year high inflation.

The dollar index was resurrected to levels of 114.56 and gained leverage over major rival currencies. As traders anxious about the possibility of Fed resorting to higher interest rates, US treasury yields are seen to incline towards the 4 per cent levels, said Ritesh Bhansali, vice-president at Mecklai Financial Services.

Fed officials were very hawkish in their commentary yesterday. The rupee is expected to be under pressure in the near-term and to test 82.50 levels. Any steps by RBI to reduce the pressure on the rupee will be eagerly awaited, he said.

Dealers said that the central bank was not intervening with a great deal of aggression while the Reserve Bank of India was selling dollars around the 81.90 mark.

RBI will have to closely monitor the situation. If not today or tomorrow, the expectation of direct or indirect intervention will rise on the policy day - that is on September 30th, according to CR Advisors. The firm sees the rupee at 82.50 - 83.00 per dollar over the near term.

The central bank's foreign exchange reserves are currently at a near two-year low, despite the RBI having heavily sold dollars over the last few months to protect the rupee from excessive volatility.