The rupee weakened sharply against a rampant dollar, driven by a broad-based selloff in global markets following a significant increase in bets on a jumbo-sized Federal Reserve rate hike as a result of hotter-than-expected inflation statistics.
Asian stocks, bonds and currencies tumbled and the dollar climbed close to a 24-year peak against the yen on Wednesday amid a jump in US yields.
PTI reported that the rupee fell 41 paise to 79.58 against the US dollar in early trade.
Bloomberg quoted the Indian currency at 79.5887 per dollar after opening weaker at 79.6037, compared to its previous close of 79.1475.
After jumping to the highest level in 15 years, rising by as much as 22 basis points, the US two-year Treasury yield, which is the most susceptible to changes in policy, continued to rise in Asia trading hours, pushing it more than 30 basis points higher than the 10-year rate and deepening an inversion, which is typically a recession warning.
The reversal in global financial markets after recent bull run cast a dark shadow over the debate about the outlook for the global economy and markets. Bank of America Corp.’s latest survey showed the number of investors expecting a recession has reached the highest since May 2020, Bloomberg reported.
According to Labor Department data, the US consumer price index edged 0.1 per cent higher from July after remaining unchanged in June. Prices increased 8.3 per cent from a year earlier, a modest slowdown but still higher than broad expectations of about 8 per cent.
That lit a fire on Federal Reserve’s rate hike expectations at the September and following meetings.
“This has really shattered the illusion…that inflation had peaked and was coming down,” Ray Attrill, head of currency strategy at National Australia Bank, said in a podcast. “Hence markets have decided that next week’s Fed decision is not between 50 and 75 (basis point increase), it’s now between 75 and 100.”
Money markets currently predict a 63 per cent chance of another 75 basis point jump, and about 37 per cent odds for a full percentage-point increase on September 21.
Reuters reported that Nomura’s economists also said they now believe a 100 basis-point rate hike is the most likely outcome.
“Markets underappreciate just how entrenched US inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” wrote Nomura’s economists in a note.
The dollar index, which compares the value of the greenback to six major currencies, including the yen, euro, and pound sterling, was little changed at 109.750 after gaining 1.44 per cent over night, the biggest single day gain since March 2020.
“The dollar is screaming overvaluation, but in order to see that as correct, you’re going to need some sort of catalyst for a cyclical downturn in the dollar, and these latest developments have challenged that,” NAB’s Mr Attrill told Reuters.
The dollar strength weighed Asian currencies.
The Korean won fell 1.5 per cent as a result of the king dollar, and the yen came dangerously close to the crucial 145-to-dollar level. The government won’t rule out any possibilities for responding to changes in the foreign exchange market, according to Japan’s top currency official.
Bloomberg reported that China extended its currency defense by setting its reference rate for the yuan with the strongest bias on record.
The People’s Bank of China (PBoC) set the daily reference rate for the yuan at 6.9116 per dollar, compared to its record of 454 pips seen last Wednesday and comes on on top of a reduction in foreign-currency reserve requirements for banks, which was also aimed at supporting the currency, according to Bloomberg.
“Many emerging markets are feeling the heat of the strong US dollar,” Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, told Bloomberg citing their debt burdens in greenbacks. “Only China can afford to defy this global rate-rise trend by keeping its easing policy stance.”