The Indian rupee is expected to open higher on Wednesday, sustaining its rally past the 86 level, supported by a fall in demand for the safe-haven dollar and upbeat risk appetite following the Israel-Iran ceasefire.
The 1-month non-deliverable forward indicated an open in the 85.92-85.96 range, versus 85.9750 in the previous session. The rupee rallied 0.9% on Tuesday, logging its best single-day performance in a month.
Rupee to hold above 86 as safe haven premium in dollar erodes
Brent crude declined 13.2 per cent over the last two days following the ceasefire, and the dollar index had declined by 0.9 per cent
Investors pared long dollar positions, unwinding bets built up during the 12-day conflict between the two countries.
"The market is unwinding risk-off trades now that it looks like the conflict won’t escalate further," said a currency trader at a Mumbai-based bank.
"We’re seeing better offers (on USD/INR) and light exporter selling. Speculators have been taking to (USD/INR) shorts."
With the Middle East risk premium deflating, attention has shifted back to the weakening US exceptionalism narrative — a key driver behind the dollar index’s nearly 10 per cent slide so far this year.
Analysts say the dollar’s trajectory from here will hinge on how US tariff negotiations unfold and whether Washington can strike trade deals with key partners. Another major driver will be how the US economy holds up amid policy uncertainty and the timing and scale of US Federal Reserve rate cuts.
Fed Chair Jerome Powell stuck to his cautious approach and reiterated that the central bank was in no rush to cut rates at his semi-annual testimony to Congress on Tuesday.
Markets continue to price a low probability of rate cut next month.
"Overall, Chair Powell continued to stress the high level of uncertainty and need for additional data.. the testimony did little to change the overall policy trajectory," Morgan Stanley said in a note.