Rupee stabilises on U.S. dollar weakness and hedging by importers

August 22, 2024

Key Points:

• The Indian rupee is expected to open flat against the U.S. dollar, following its best day in nearly two months as the dollar index remains near its lowest level of the year.
• Importers are likely to take advantage via hedging of any short-term rupee strength to hedge their U.S. dollar exposures, potentially limiting the rally.

This is a follow up article to: Indian rupee set to strengthen as confidence in Fed rate cuts grows

The Indian rupee (Symbol: USDINR) is expected to stabilise marking its best day in almost two months, as the U.S. dollar experienced a broad decline. The U.S. dollar index (Symbol: USDX), which measures the greenback against a basket of major currencies, remains near its lowest level this year, adding pressure on the dollar.

Picture: USDINR runs flat as the U.S. dollar declines, as observed on the VT Markets app.

This recent decline in the dollar lacks a clear trigger, which raises concerns about the sustainability of the greenback’s weakness. This unmotivated dollar sell-off could suggest that market participants are beginning to unwind their long dollar positions against the rupee, providing some relief to the Indian currency.

Despite this, market participants are sceptical about the ability of the rupee to sustain a significant rally from current levels. The broader trend suggests that the rupee could continue to face downward pressure, especially as importers are expected to use any strength in the rupee to hedge their dollar exposures. This hedging activity could limit its upside potential in the near term.

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The focus now shifts to the upcoming comments from Federal Reserve Chair Jerome Powell, which could provide further direction for the dollar and, by extension, the rupee. The market is also closely monitoring the Reserve Bank of India’s actions as it continues to defend the 84-level, a key psychological threshold for the USDINR pair.

Short term opportunity or risk for the rupee

The recent dollar weakness could offer a brief window for rupee gains, but the broader market sentiment suggests caution. Traders should be mindful of potential volatility surrounding Federal Reserve Chair Jerome Powell’s comments and any shifts in the RBI’s intervention strategy. Importers’ hedging activities are likely to create resistance to any significant rupee appreciation, making it crucial for traders to stay nimble and closely monitor market developments.

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