Indian rupee drops against UAE dirham, premiums dip on Fed push back

The Indian rupee declined on Tuesday as its failure to hold above a key level prompted renewed dollar buying interest, while forward premiums inched lower after more Federal Reserve officials pushed back on interest rate cut expectations.

The South Asian currency was at 83.1875 to the US dollar (22.67 against UAE dirham) at 9.14am UAE time, compared to its previous close of 83.06 (22.63).

The currency had on Monday managed to strengthen past 83, but failed to hold the level.

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Its looks like "the breakdown" below 83 on USD/INR "was a false one" and we are back to the "range of 83 to 83.40 that has held for what seems forever", an FX trader at a bank said.

"We are seeing good (dollar) bids and it could be that RBI (Reserve Bank of India) is in action again."

The Indian rupee and most other Asian currencies struggled after more Fed officials indicated that the market is probably too optimistic in its rate cut expectations.

Chicago Fed President Austan Goolsbee said the Fed is not precommiting to cutting interest rates soon, and Fed Cleveland President Loretta Mester said financial markets had got "a little bit ahead", the Financial Times reported on Monday.

The comments followed a plunge in US Treasury yields and rally in US equities in wake of what was seen a dovish pivot by the Federal Reserve last week.

Near-maturity US yields have moved slightly up following the Fed push back. Tracking that, dollar/rupee forward premiums have dipped with the 1-year forward implied yield down to 1.71 per cent.

Meanwhile, the Bank of Japan left its key policy rate at -0.10 per cent and forward guidance unchanged on Tuesday.

"We expect policymakers to end negative rates in January and to phase out YCC (yield curve control) later in 2024," Capital Economics said in a note.

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