Rupee gains as Fed outcome knocks down the dollar

Gurumurthy K BL Research Bureau | Updated on January 09, 2018

The central bank leaving its future rate hike path unchanged, triggers a sell-off in the greenback

The Indian rupee opened with a gap-up on Thursday following a sharp fall in the dollar index. The US dollar was beaten down after the outcome of the US Federal Reserve’s final meeting for this calendar year on Wednesday. The Fed, as expected, increased the interest rates by 25 basis points. Also, it left the median projection of the policy rates unchanged for the next year at 2.1 per cent. This leaves room for three rate hikes next year.

Strong economy

The Fed continues to remain confident about US economic growth. This is evident from the higher revisions in its growth projections. The Fed expects the US to grow at 2.5 per cent this year, up from 2.4 per cent projected in September. For 2018, it has revised the growth rate higher to 2.5 per cent from its earlier projection of 2.1 per cent made in September. The central bank said the changes in tax policies could provide “some lift” to economic activity. However, the Fed Chair, Janet Yellen, said the higher revisions in the growth projections should not be assumed as the impact of the tax policy changes. She indicated in her press conference that the tax policy change is not the only factor, but is just one among the many that are considered for projections.

Dollar falls

A no-surprise from the US Federal Reserve’s meeting on Wednesday triggered a sell-off in the dollar. The US dollar index fell 0.7 per cent from around 94.1 to 93.4 on Wednesday. It has bounced up slightly, after hitting a low of 93.33 on Thursday and is currently trading around 93.45. Immediate support is at 93.25, which is holding as of now. If the index manages to sustain above this support, a bounce to 93.8 is possible in the near-term. A strong break above 93.80 is needed for the index to bring back the bullish sentiment. On the other hand, if the dollar index breaks below 93.25 in the coming days, it can fall to 93 or even 92.7 thereafter.

The year 2017 has been a bad year for the US dollar. The US dollar index has tumbled about 9 per cent (year-to-date) so far this year. With this sharp fall, the dollar is all set to close the calendar year 2017 on a negative note for the first time since 2012.

Rupee gains

The sharp fall in the dollar index helped the rupee gain momentum on Thursday. The domestic currency opened with a gap-up and made an intraday high of 64.25. It is currently trading around 64.31.

The rupee is likely to retain its strength and move further higher to test the key resistance level of 64.18 in the coming days. Whether the currency breaks this hurdle or not will then decide the next move.

If the rupee manages to breach 64.18, it can strengthen further to 64 or even 63.85 in the coming weeks. But if it reverses lower from 64.18, there is a strong likelihood of the rupee weakening to 64.35 and 64.5 levels again.

Published on December 14, 2017

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