Rupee opens 6 paise lower at 95.28 against US dollar amid spike in crude oil prices

The rupee opened 6 paise lower at 95.28 against the US dollar on Friday, 7 August, as a sharp rebound in crude oil prices weighed on sentiment and strengthened expectations that the US Federal Reserve could maintain a hawkish stance.

Market participants are also awaiting the US July jobs report, due later in the day, for fresh clues on the health of the labour market and the Fed's interest rate trajectory.

Brent crude surged around 4% on Thursday and extended gains by another 1% in Asian trade, trading near $84 a barrel amid renewed concerns over shipping through the Strait of Hormuz.

Investor worries intensified after Iran, in coordination with Oman, proposed restricting vessels deemed hostile from transiting the strategic waterway and imposing substantial penalties on those violating the proposed rules.

Oil prices have remained the primary driver of the rupee in recent months, while the Reserve Bank of India's (RBI) policy measures and foreign exchange market interventions have also played a crucial role in shaping the currency's movement.

The rupee had recently strengthened beyond the 95-per-dollar level, supported by Brent crude falling below $80 a barrel and RBI dollar sales. However, with geopolitical tensions pushing oil prices higher once again, traders told Reuters that the rupee's near-term direction will largely depend on the extent of RBI intervention in the currency market.

Fed officials reinforce hawkish stance

The US dollar has also remained resilient after St. Louis Federal Reserve President Alberto Musalem said he supported a rate hike at last week's policy meeting. Musalem cautioned against easing monetary policy prematurely on expectations of future productivity gains from artificial intelligence, arguing that doing so could undermine the Federal Reserve's inflation-fighting credibility.

His comments helped keep the US Dollar Index close to the 100 mark, reinforcing expectations that US interest rates may remain higher for longer.

Rising US bond yields pressure emerging markets

Analysts note that the dollar is also drawing support from a sharp rise in U.S. Treasury yields. The 30-year Treasury yield is hovering near 5.17%, its highest level since 2007, as investors factor in a prolonged higher-rate environment and increased U.S. government borrowing.

Higher Treasury yields tend to attract global capital into dollar-denominated assets, reducing the appeal of emerging market currencies such as the Indian rupee.

RBI's forward book remains in focus

According to market experts, the Reserve Bank of India (RBI) has relied on its forward dollar positions to smooth volatility in the foreign exchange market. The central bank's short dollar forward book has reportedly expanded to a record $106.7 billion, helping contain excessive rupee weakness in recent months.

However, analysts caution that these contracts represent deferred dollar obligations that will eventually need to be settled, making the RBI's forward position an important factor to monitor for the rupee's medium-term outlook.

Rupee Outlook

According to Amit Pabari, MD, Research Team, CR Forex Advisors, with oil back near $83, the dollar firm near 100, and US yields elevated, 95.00-95.10 stands out as a solid support for the rupee, and the currency climbing back towards the 96.00-96.20 zone looks real. Global developments, particularly around oil prices and the dollar, are likely to remain the key drivers for the rupee in the near term, keeping the overall bias tilted towards weakness.

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