The rupee erased early gains to weaken against the dollar on Thursday on higher US Treasury yields, while government bond yields rose ahead of a weekly debt auction as traders took short positions in the benchmark 10-year paper, dealers said.
The domestic currency settled 0.37 per cent lower at 94.04 per dollar, against the previous close of 93.69.
“There was dollar buying by nationalised banks ahead of the consumer price index data release, which pushed the rupee towards 94 per dollar,” said a dealer at a private bank. “It opened with a gap in the morning because of a fall in crude and inflows.”
“The rupee surrendered its early gains amid bargain dollar buying and broad-based dollar strength. Aggressive dollar demand from a state-owned bank ahead of the inflation data release pushed the dollar-rupee pair above 94.00,” said Dilip Parmar, senior research analyst, HDFC Securities.
The rupee’s decline came after it touched its strongest level since April in the previous session. A recovery in crude oil prices and a reversal in domestic equities weighed on the currency, erasing early gains supported by foreign portfolio inflows.
Brent prices fell over 1 per cent to an intraday low of around $91.20 a barrel following reports of planned US-Iran diplomatic talks and renewed Russia-Ukraine peace negotiations. Prices later rose to trade around $92.31 a barrel, compared with the previous close of $92.73, as concerns over shipping risks in the Strait of Hormuz persisted. Meanwhile, the dollar index traded at 102.88, higher than its previous close of 102.50, after touching an intraday high of 103.09, supported by expectations of further Federal Reserve rate hikes.
The dollar index measures the strength of the greenback against a basket of six major currencies.
In the government bond market, the yield on the benchmark 10-year government security rose 3 basis points to 7.25 per cent, while the five-year yield hardened 6 basis points to 6.95 per cent.
“Traders have already placed short bets. The 10-year yield is facing a mini resistance around 7.24 per cent-7.25 per cent, and it can hold this 7.25 per cent level for some time,” said a dealer at a primary dealership.
Market participants said a further decline in crude below $90 a barrel could trigger a rally in government bonds.
“If crude goes below $90 a barrel, there can be a huge rally after that because people will take cover in the auction and the rest of them will try to square off their positions,” said a dealer at a primary dealership.
The yield’s movement will also be watched for a possible break below the 7.25 per cent level, which could open the way for a decline towards 7.15 per cent.
