Rupee rallies along with Asian FX as markets sense Fed pause

MUMBAI, March 23 (Reuters) – The Indian rupee strengthened to over a one-week high against the US dollar on Thursday, as markets anticipated that the Federal Reserve was near the end of its rate hiking cycle.

The rupee was trading at 82.1650 per dollar by 11:15 a.m. IST, compared to its close of 82.6550 on Tuesday.

Indian foreign exchange markets were shut on Wednesday for a public holiday.

Asian currencies were buoyant as the dollar index languished at seven-week lows after the Fed hiked rates by 25 basis points (bps) and mellowed its hawkish stance by hinting it was on the verge of pausing after the recent collapse of two US banks.

Although the Fed seemed to indicate another hike was possible and no rates would be cut this year, money markets showed a 60% probability of a pause as soon as the May meeting and 70 bps worth of rate cuts in 2023.

The rupee is seeing strength as traders need to offload dollars before liquidity issues worsen during the fiscal year-end period so they maybe capitalising on good trading volumes today, said a state-run bank trader.

Central banks in Europe and England would need to hike rates further to tame inflation, which means the dollar will stay on the backfoot for sometime, HDFC economists said in a note.

“We could see gains across most Asian emerging market currencies as well, and the USD/INR is expected to trade between 81.80-82.50 in the near-term.”

Bank of England meets later in the day and is expected to raise rates for the 11th time in a row after inflation shocked on the upside.

Meanwhile, gains in equities were capped by Fed Chair Jerome Powell reiterating the need to fight inflation and that the banking industry stress could trigger a credit crunch with “significant” implications for the US economy.

(Reporting by Anushka Trivedi; Editing by Sonia Cheema)