Rupee sheds 0.2% to dollar as Covid worries trigger slump in yuan

Talk of persistent rate hikes by US Fed officials also drags rupee lower

The rupee weakened 0.2 per cent against the dollar on Monday as rising Covid-19 cases in China sparked fears of strict restrictions in the world’s second largest economy, eroding appetite for emerging market currencies.

Comments by several members of the US Federal Reserve in support of continued increases in interest rates also dragged the rupee lower as the dollar index notched up gains.

The rupee closed at 81.85 to the dollar on Monday as against 81.69 on Friday. So far in 2022, the domestic currency has depreciated 9.2 per cent versus the greenback.

With China facing a flare-up in Covid-19 cases across the country, official statements from Beijing warned of increased curbs on activity to stem the spread of the disease. The development led to a sharp fall in the yuan, which tumbled around 0.6 per cent, as concerns built up over the impact of Covid restrictions on economic growth.

A decline in the Chinese yuan generally tends to spill over into other emerging market currencies.

The global bout of risk aversion, coupled with the Fed commentary on higher interest rates sent investors to the safety of the US currency, with the dollar index rising to a high of 107.90 during Indian trading hours. The index was at 107.79 at 3:30 pm IST versus 106.46 at the same time on Friday.

Over the last couple of days, St Louis Fed President James Bullard, San Francisco Fed President Mary Daley and Kansas Fed President Esther George have all hinted at rates continuing to head higher.

“The Indian rupee depreciated against the dollar amid fears of a return to stricter Covid restriction measures in China weighed on Asian currencies,” HDFC Securities research analyst Dilip Parmar said.

“The dollar index rises 0.8 per cent to 107.81, its third straight day of gains, as risk appetite dwindles amid concern over rising cases of Covid in China. Spot USD/INR is expected to trade in the range of 82.40 to 81.50 with an upward bias,” he said.

Currency traders now await the release of the minutes of the Federal Reserve’s November 1-2 meeting. The minutes, due on November 23, would provide greater clarity on the incremental policy tightening that the US central bank may carry out following 375 bps of rate hikes in 2022.

After two months of heightened volatility, the rupee has enjoyed a spell of relative strength in November as data showed a larger-than-expected decline in US inflation. The domestic currency has strengthened 1.1 per cent so far this month and is currently quite some distance away from the record intraday low of 83.29 per dollar touched on October 20.

However, if the US Federal Reserve were to continue to hike rates in tranches of 75 bps each -– as it has done on the last four occasions –- the rupee could take a fresh beating, analysts said. The latest US inflation data has sparked hope of the Fed slowing down rate hikes. Higher US interest rates lead to global funds flowing to the world’s largest economy, diminishing the appeal of emerging market currencies like the rupee.

“DXY (dollar index) found strong support at 106.50 levels, with space to test 109.00 levels again. Fed officials continue to remain hawkish with their outlook on rate trajectory. For USD/INR, 81.50 may act as a base while 82.40 levels may be on cards. All eyes now remain on Fed minutes to be released this week,” Kunal Sodhani, vice-president at Shinhan Bank said.