By Nimesh Vora
MUMBAI (Reuters) - The Indian rupee is expected to jump against the dollar on Friday, after softer-than-expected U.S. inflation prompted bets that the Federal Reserve will pivot to a slower pace of rate hikes.
The rupee is tipped to open at around 80.70-80.80 per U.S. dollar, its highest level in almost seven weeks and up from 81.8075 in the previous session.
The dollar index and Treasury yields plunged, while U.S. equities soared on signs that inflation was turning a corner. The headline U.S. consumer price index and the core inflation both rose less than expected in October.
The relief on the inflation reinforced the likelihood that the Fed will opt for smaller rate hikes from its December meeting onwards. The probability of a 50-basis points (bps) hike in December reached 80%, from nearly 55% ahead of the data.
Fed Chair Jerome Powell had signalled after the November policy decision that a moderation in the size of hikes was possible. The inflation data made it highly likely that the Fed will step down from the 75-bps hikes it had delivered in the last four meetings.
"This is a rare moment of good news on inflation," ING Bank said in a note. The Fed will keep hiking but the latest reading outcome "is very supportive" for it to step down to a 50-bps hike at the December meeting.
Reflecting this, near-maturity Treasury yields collapsed. The dollar index dropped 2%, its biggest decline in many years.
Asian currencies rallied, with the Korean won climbing almost 2%. Hong Kong equities rose 5%, matching the overnight rally on the S&P 500 Index.
"At such times, when there is a tendency to get carried away, it would be good to identify support levels (for USD/INR)," a Mumbai-based trader said.
"We see two major ones at 80.40 and at 80.00."
** One-month non-deliverable rupee forward at 80.82; onshore one-month forward premium at 17.5 paise
** USD/INR NSE Nov futures settled at 81.8575 on Thursday
** USD/INR Nov forward premium at 8.5 paise
** Dollar index at 108.22
** Brent crude futures up 0.3% at $93.9 per barrel
** Ten-year U.S. note yield at 3.81%
** SGX Nifty nearest-month futures up 1.8% at 18,413
** As per NSDL data, foreign investors bought a net $67.1 million worth of Indian shares on Nov. 9
** NSDL data shows foreign investors bought a net $33.9 million worth of Indian bonds on Nov. 9
(Reporting by Nimesh Vora; Editing by Savio D'Souza)