The rupee retreated from its early highs to close marginally up by 2 paise at 72.53 against the US currency on Thursday due to a resurgent dollar as US bond yields spurted to 14-month high.
Subdued equity markets also dampened the sentiment but persistent forex inflows and lower crude prices supported the rupee.
The US bond yields surged to a 14-month high of 1.74 per cent after the US Federal Reserve indicated continuation of its easy money policy to support the economic recovery. The high bond yields sparked flight of investment from riskier assets like stocks to safe-haven bonds.
The US Federal Reserve kept the rates unchanged, as expected, on Wednesday in its latest policy action but projected a strong economic recovery and an increase in inflation above target.
The comments fuelled inflationary concerns pushing the bond yields further.
At the interbank forex market, the local unit opened strong at 72.48 against the greenback, which was trading lower against the leading global currencies in early trade. Later the rupee hit a high of 72.43 in morning trade due to lower oil prices and forex inflows.
However, in the second half of the session the rupee lost steam due to weak global cues and recovery in the US dollar index.
The rupee hit a low of 72.60 before settling 2 paise higher at 72.53 against the American currency. On Wednesday, the rupee had settled at 72.55 against the American currency.
On the domestic equity market front, the BSE Sensex ended 585.10 points or 1.17 per cent lower at 49,216.52, while the broader NSE Nifty dropped 163.45 points or 1.11 per cent to 14,557.85.
The dollar index, which gauges the greenback's strength against a basket of six currencies, advanced 0.24 per cent to 91.65.
Brent crude futures, the global oil benchmark, fell 0.35 per cent to USD 67.76 per barrel.
Foreign institutional investors remained net buyers in the capital market as they bought shares worth Rs 2,625.82 crore on Wednesday, according to exchange data.
"Rupee opened higher against the US dollar but was weighed down in the later half of the session following a surge in US 10-year yields and weakness in domestic equities," Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services, said.
Dollar fell against its major crosses initially after the Fed Chairman signalled that it was in no hurry to raise rates through all of 2023 even as it saw a V-shaped recovery. Pound has risen ahead of the important Bank of England policy statement that will be released on Thursday, he added.
"We expect USD/INR (Spot) to trade sideways with a negative bias and quote in the range of 72.20 and 72.80," Somaiya said.
The rupee was almost flat against the dollar as a further uptick in US Treasury yields masked the impact of positive Asian cues following the Federal Reserve’s dovish guidance on rates, Sriram Iyer, Senior Research Analyst at Reliance Securities, said.
"Even as the Fed is dovish on rate hikes, markets would try to test its signal and the 10-year yield could spike further. That could hurt the rupee," he added.
The US bond market selloff continued with the 10-year bond yield hitting a fresh 14-month high of 1.7450 per cent on Thursday, taking its year-to-date advance to 84 basis points. The sharp uptick in yields came despite a dovish commentary from the Fed at the end of its two-day meeting, Iyer said.
"In terms of economic outlook, the Fed expects US gross domestic product growth to increase to 6.5 per cent in 2021, thanks to more stimulus and faster vaccine rollouts under President Joe Biden, and to 3.3 per cent and 2.2 per cent in 2022 and 2023, respectively, before it settles into a longer-term range of 2.3 per cent. Headline inflation is expected to run at 2.4 per cent this year, against the Fed’s target of 2 per cent.
"The US central bank expects rates to be on hold till 2023, as projected in the December dot plot, despite a much greater hawkish tilt to member expectations," Iyer said.
