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The rupee is likely to struggle to gain any more over the next 12 months as a US dollar rally gathers pace on hopes of a strong economic recovery there, while the Chinese yuan is expected to appreciate a little, a Reuters poll found.
The rupee had a stellar first six months of 2014, rising almost 3%, first on expectations of a majority government led by Narendra Modi and then following through on the election result. Between January and July, India's stock market soared 22%.
But analysts believe the currency's advance is largely over, for now. A broad rally in the dollar, on expectations the Federal Reserve will raise interest rates in the second quarter of next year, will probably thwart any further gains.
The poll of more than 30 currency strategists, conducted Aug 4-8, predicted one US dollar will fetch Rs 60.50 in a month, Rs 60 in six months and Rs 60.50 in a year. The dollar was trading around 61.59 on Friday.
Those forecasts are largely unchanged from last month's survey and show the reluctance of currency strategists to predict large gains even with a surge in net inflows and an improving Indian economy.
Mirza Baig, head of foreign exchange research in Asia for BNP Paribas, expects the rupee to trade in a range, then weaken slightly to 62.00 in a year due to a strengthening US dollar.
"Increased financial volatility and weaker global sentiment will also dominate the rupee in the near-term. And the Reserve Bank of India itself will prevent an appreciation as it buys dollars to shore up currency reserves," he said.
As of July 25, India had foreign exchange reserves of $320.5 billion. Although the volume is quite small relative to the country's size, the RBI has steadily built it up to help cushion the currency from sudden falls.
Although the rupee is not expected to slump back to its record low of 68.80 per dollar in August 2013, a Reuters poll on Wednesday placed a high risk of another sell-off in emerging market currencies over the next 12 months.
That is largely due to a long-anticipated dollar rally taking hold of currency markets in July.
The dollar has strengthened more than 2% against a basket of currencies since the beginning of July. The trend will likely continue as stronger economic data feeds expectations of an interest rate hike, which in turn will likely push up US Treasury bond yields.
YUAN TO STRENGTHEN
China's yuan is expected to slowly strengthen over the next 12 months after a sharp slide earlier this year, as markets expect its central bank to be comfortable with a stronger currency as the economy recovers.
The currency is expected to change hands at 6.17 yuan a US dollar in one month, 6.13 yuan in six months and 6.05 yuan in a year. It was trading around 6.16 on Friday.
Those predictions are stronger than last month's poll and reflect the optimism taking hold after recent numbers showed a revival in factory activity. But China's overheated and now rapidly-cooling property market is a serious economic risk.
China's exports in July leapt 14.5% from a year earlier, nearly double the expected increase, while imports posted a surprising fall of 1.6%, data showed on Friday.
Keeping with the latest strong economic data, the People's Bank of China set a higher midpoint rate of 6.1562 per dollar on Friday and currency traders expect it to keep extending the currency's trading band.
The spot rate is currently allowed to trade 2% above or below the midpoint.
