Rupee drops after Powell dashes pivot hopes, premiums fall
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The Indian rupee declined versus the dollar on Thursday after the U.S. Federal Reserve Chair Jerome Powell pushed back against expectations of a relatively less hawkish stance.
The rupee ended at 82.88 per U.S. dollar, down from 82.78 in the previous session. It was a muted but choppy session, with rupee turning briefly higher by mid-morning before slipping back below 82.90.
The rupee's Asian peers were down 0.3% to 0.6%. The offshore Chinese yuan slipped below 7.34 to the dollar.
Asian currencies struggled in the wake of rise in Treasury yields after Powell's remarks at the press conference. Powell said rates could peak at higher levels than policymakers previously thought, while it is premature to discuss when the Fed might pause its increases.
Meanwhile, the Fed's policy statement said that the U.S. central bank will take into account the cumulative tightening of monetary policy, which analysts said hinted at smaller sized rate hikes from here on.
Treasury yields and U.S. equities rose after the Fed statement, but revered course after Powell's presser. The 2-year Treasury yield in Asia trading reached new year-to-date highs.
We believe that the Fed' communications should leave a bias for higher overall rates, especially front maturities, BofA Securities said in a note.
Powell's preference "to err on over-tightening and upside risks to the terminal rate are bullish dollar", BofA added.
The dollar index jumped to 112.75. Last Wednesday, it had dropped to near 109.50.
USD/INR forward premiums, tracking the rise in Treasury yields and the weaker rupee, dropped. The 1-year implied yield dropped 10 basis points to about 2.25%. It's not too far from multi-year lows of 2.18% reached last month.
Indian shares and oil prices dropped, while U.S. equity futures were marginally lower after the overnight selloff.
