Rupee's rally faces test from post-Fed US yield rise; oil worries linger
The Indian rupee's rally to a nearly three-week high faces a test from higher U.S. Treasury yields on Thursday after the Federal Reserve's policy decision, while volatile oil prices remain a key risk.
The rupee is expected to open slightly weaker to flat, having advanced 0.2% to settle at 95.6475 on Wednesday.
The currency has rallied for four straight sessions, rising over 1%, with traders attributing much of the move to sustained support from the Reserve Bank of India.
The central bank sold dollars aggressively on Friday when the rupee was at risk of slipping to an all-time low. Since then, it has intervened on each trading day, although the scale of intervention has moderated, according to traders.
What the RBI is doing is "making it clear early" in the day that it will be present in the market, and that tends to set the tone for the rupee, a currency trader at a bank said.
MARKETS QUESTION FED
U.S. 30-year Treasury yields hovered near their highest level in almost two decades with investors questioning the Fed's resolve to bring inflation under control, prompting demand for higher compensation against inflation risks.
The selloff followed the Fed's decision to keep interest rates unchanged amid three dissents in favour of a rate hike. Fed Chair Kevin Warsh reiterated the central bank's commitment to containing inflation while stopping short of signalling what policy actions might be required.
"We think the market is ultimately telling us (and Warsh) that talk is cheap with the combination of these moves, and that it is not enough to just say and proclaim that price stability is paramount," MUFG Bank said in a note.
"In other words, the Fed has to eventually walk the talk on inflation under this new regime."
OIL RISKS
The U.S. carried out fresh strikes in Iran on Wednesday, according to the U.S. military, further escalating a months-long conflict and keeping upside risks to oil prices firmly in focus.
Brent crude surged nearly 8% on Wednesday before pulling back slightly in Asian trading. [O/R]
