Rupee searches for direction around familiar resistance level

A man counts Indian currency notes inside a shop in Mumbai

By Nimesh Vora

MUMBAI (Reuters) - The Indian rupee briefly rose against the dollar above a level that's being closely watched by traders, but was unable to pierce it convincingly.

The rupee was trading at 81.25 per U.S. dollar by 10:32 a.m. IST compared with 81.36 in the previous session. The local currency reached an intraday high of 81.13.

Speculators were likely encouraged by the move below 81.20 (for USD/INR) after a few failed attempts, said a trader at a private sector bank. However, it looks like there may not be much in the 81.20 breach, but the afternoon could surprise us, they added.

A fall in the Chinese yuan alongside rising oil prices could potentially prevent the rupee from having a go at the 81 level. The offshore yuan declined below 6.79 to the dollar while Brent crude futures rose to near $86.50 a barrel.

The dollar index was slightly higher and near-maturity Treasury yields inched up. The dollar's outlook against its major peers remains challenging on expectations that the U.S. Federal Reserve is almost nearly done with its rate hike cycle.

The peak Fed rate expectations have settled below 5% and futures are pricing in a cut of about 50 basis points (bps) in the second half of 2023. A string of weak U.S. economic data, from retail sales to services to housing, have prompted investors to ramp up bets of Fed rate cuts later in 2023.

The Fed policy decision on Feb. 1 will provide investors with more insights into its thinking on the risks of growth and inflation. The central bank is widely expected to hike rates by 25 bps in February, a further downshift from the 50 bps it opted for at the last meeting.

(Reporting by Nimesh Vora; Editing by Janane Venkatraman)