Rupee may firm on smaller Fed rate hike bets; dollar hits 7-month low

Illustration photo of an India Rupee note

By Nimesh Vora

MUMBAI (Reuters) - The Indian rupee is poised to open higher against the U.S. dollar on Tuesday, tracking more broad losses on the greenback, as traders bet that the Federal Reserve could opt for smaller interest rate hikes.

The rupee will likely open at around 82.25-82.30. The local currency ended at 82.36 on Monday, marking its best session in two months.

"The rupee had the tailwind of a struggling dollar, but we do not think it will be enough to take it above the 82-level," a trader at a Mumbai-based bank said. In fact, USD/INR could run into a "mountain of support" at around 82.20 itself, he added.

The dollar index dropped below 103 overnight to its lowest level since June, extending its U.S. jobs data-prompted slide. The reading showed a slowdown in wage growth, which fuelled hopes that inflation is slowing down and the Fed would dial back on its hawkish stance.

ING Bank said in a note that after the U.S. jobs data, Fed futures have reverted to pricing in a peak rate of less than 5%. The current implied peak comes in June this year at 4.93%.

The focus now shifts to Fed Chair Jerome Powell's speech later in the day and to the critical U.S. inflation on Thursday.

Fed policymakers said on Monday the inflation data will help them decide whether they can slow the pace of interest rate hikes at their upcoming meeting to 25 basis points.

Meanwhile, Asian currencies were trading mostly higher, but the advance was more muted than on Monday. Asian shares were mixed, while U.S. equity futures inched lower. Overnight, U.S. shares slipped overnight, unable to sustain an earlier rally.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 82.32; onshore one-month forward premium at 13.5 paise

** USD/INR NSE January futures settled on Monday at 82.4525

** USD/INR January forward premium at 7.5 paise

** Dollar index at 103.24

** Brent crude futures down 0.6% at $79.2 per barrel

** Ten-year U.S. note yield at 3.53%

** SGX Nifty nearest-month futures down 0.2% at 18,140

** As per NSDL data, foreign investors sold a net $323.8mln worth of Indian shares on Jan. 8

** NSDL data shows foreign investors sold a net $15.8mln worth of Indian bonds on Jan. 8

(Reporting by Nimesh Vora; editing by Uttaresh.V)