Rupee ends higher against US dollar but down for month on rate hike concerns

The change in expectations around how many more rate hikes the U.S. Federal Reserve will deliver pressured the rupee and other emerging market currencies in February. The better-than-expected U.S. jobs data coupled with upbeat retails and hotter inflation readings prompted investors to reassess the outlook on the Fed funds rate.

With U.S. inflation showing little sign of slowing, the Fed mantra of ongoing hikes will continue with 25 bps moves in March, May and June fully priced by markets, ING Bank said in a note this week.

At the beginning of this month, investors had priced in a peak Fed rate of under 5% and around 50 basis points of rate cuts this year. Futures are currently pricing in a peak rate of 5.40% and less than 10 bps of rate cuts.

U.S. yields have jumped and the dollar has recovered. The 2-year U.S. yield climbed 80 bps in February, helping lift the dollar index by 2.5%.

While the rupee declined in February, it fared much better than its Asian peers, thanks to the Reserve Bank of India’s intervention. The dollar rose 3% against the offshore yuan, and rallied more than 7% versus the Korean won and the Thai baht.

“It seems the (Indian) central bank remains super active and is not eager to see the USDINR fly to a new all-time high,” Anindya Banerjee, head of research – FX and interest rates at Kotak Securities, said.