UAE: Indian rupee trades flat against dirham; forward premiums up on rising Fed rate cut bets

The Indian rupee was barely changed on Tuesday as dollar demand continued to limit gains even as the index languished close to its lowest level in nearly five months.

The South Asian currency was at 83.1650 against the US dollar (22.66 against UAE dirham) as of 8.20am UAE time, little changed from its close at 83.14 (22.65) on Friday.

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Most Asian currencies strengthened and were up between 0.2 to 0.5 per cent. The dollar index was largely steady at 101.6 in Asia hours but had dropped to its lowest since late July on Friday after softer than expected US inflation data.

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While "sentiments favour rupee bulls," the currency is unlikely to see meaningful gains and may hover between 83.05 and 83.25 (22.63- 22.68) in Tuesday's session, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.

Core personal consumption expenditure (PCE) inflation, the US Federal Reserve's preferred inflation gauge, rose 0.1 per cent month-on-month in November, less than the 0.2 per cent expected by economists polled by Reuters.

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The core PCE price index rose 3.2% year-on-year in November, the smallest rise since April 2021.

The data is likely to support bets that the Fed will begin easing policy rates soon. Investors are currently pricing a slightly less than 90 per cent chance that the Fed will cut rates at its March meeting, according to CME Group's FedWatch tool.

Meanwhile, rupee forward premiums ticked up with the one-year implied yield rising 2 basis points to 1.77 per cent.

Forward premiums could have more room to rise as the "paying bias" is likely to continue in the near-term, a foreign exchange trader at a private bank said.

Forward premiums have been supported by rising Fed rate cut bets even as the Reserve Bank of India is expected to stay on an extended pause.

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