The Fed is expected to decline against the dollar on Thursday ahead of the crucial U.S. inflation data that will help traders assess the size of the Federal Reserve'sFederal Reserve's next rate hike.
The rupee is likely to open at 81.55 -- 81.60, compared to 81.4350 in the previous session.
The local unit reached an almost six week high of 81.21 on Wednesday before slipping in the last hour of trade on likely dollar buying by a public sector company, according to traders.
A dealer at a Mumbai-based bank said that the late rally on the dollar has deflated the rupee's upside momentum.
A decent recovery in the dollar index would also work against the rupee, the dealer said.
The dollar index was up 0.8% overnight to 110.40, after losses for the U.S. equities. The S&P 500 index fell more than 2%. Asian shares followed their U.S. peers lower, and currencies dipped.
Consumer prices rose by 0.6% month-on-month in October and by 8% annually, according to the U.S. inflation data due later in the day. The core inflation rate is projected to rise by 6.5% year-on-year.
The data came after the U.S. Federal ReserveFederal Reserve Chair Jerome Powell signalled that the central bank could opt for small rate hikes at this month's post policy presser. The Fed has hiked rates by 75 basis points in the last four meetings in an effort to bring down inflation.
There is a more than 40% chance that the Fed will raise rates by 75 bps in December, despite the fact that futures are pricing in more than 40%. The dollar's outlook and the rupee's and other emerging markets currencies will be affected by how these odds change after the data is released.
Treasury yields fell overnight, with longer-maturity yields falling more than those at the shorter end. The 2 year yield was close to 4.60%.