Rupee Weakens Significantly Against Raging Dollar On Aggressive Fed Rate Hike Prospects

The rupee weakened significantly against a rampant dollar driven by expectations for a very aggressive Federal Reserve rate hike path, including a likelihood of a 100 basis points increase next week after hotter-than-expected US inflation reading.

Bloomberg showed the rupee was last at 79.6775 per dollar after having falling to an intra-day weak level of 79.7325, compared to its previous day close of 79.4400.

PTI said the rupee fell 21 paise to close provisionally at 79.73 against the US dollar.

The dollar, which has increased this year along with the rise in US interest rates and the worldwide need for safety, was once more displaying its strength. 

That rise in the dollar follows this week's hotter-than-expected US consumer-price inflation figures, short-end rates continued to climb to levels not seen this century.

As a result, the premium of the two-year Treasury yield over the similar 30-year benchmark climbed 35 basis points on Thursday, driving the yield curve inversion to levels last seen in 2000, beyond the depths reached in August.

“The curve is flattening more and the hard-landing scenario is a higher risk after the inflation data,” John Madziyire, a portfolio manager at Vanguard, told Bloomberg. “More rate cuts are being priced in 2023 into 2024,” by interest rate futures, he added. 

Inversions of the Treasury curve are closely observed indicators that are thought by many to be a sign of impending economic trouble or outright recession.

“The market is going to give the Fed the option to move 100 basis points next week,” John Brady, managing director at RJ O'Brien, a futures brokerage in Chicago, told Bloomberg.

“The Fed may not.” Beyond the market pricing for September, traders are also providing the central bank with “the option to go 50 basis points at the November and the December meetings,” he said.

But for now, the greenback's surge has almost every other major currency globally in a rut, with the dollar index near a two-decade peak scaled last week.