Rupee gains as dollar tumbles

The rupee which was oscillating around 64 for most part of the week got a boost of Friday. The outcome of the European Central Bank (ECB) meeting dragged the US dollar index to 91.13 — its lowest since January 2015. This aided the rupee to open with a gap-up above 64 on Friday and make a high of 63.79. But the domestic currency came off from this low giving back some of the gains and closed at 63.93 on Monday.

The rupee has strengthened against the US dollar this year. But the case has been the reverse against the Euro. The US dollar has been beaten down by the Euro strongly since the beginning of this year. Last week, the ECB raised the growth forecast for this year to 2.2 per cent from its previous forecast of 1.9 per cent. ECB President Mario Draghi also said that the “bulk of the decisions” on tapering its stimulus program will be made in October. This gave a boost to the European currency and took it above 1.20 against the dollar and the dollar index was pulled down to a the lowest in more than two years.

The Euro has skyrocketed over 14 per cent (year-to-date) from 1.05 to the current levels of 1.20 against the dollar this year. Though this rally has helped the rupee stay strong against the dollar, the domestic currency has weakened sharply against the euro over the last five months. From around 68 in April, the rupee has tumbled about 12 per cent against the Euro and is currently trading around 77. As long as it stays below 75, there is a strong likelihood of the rupee weakening to 80 or even lower levels against the Euro in the coming months.

The coming week is packed with a series of important macro-economic data releases. The Index of Industrial Production (IIP) and the Consumer Price Index inflation numbers are due for release today. It will be followed by the Wholesale Price Index inflation data on Thursday. The country’s trade data is also due for release this week.

On the global front, the US inflation data and the Bank of England’s policy meeting, both on Thursday, are the important events to watch.

There is a possibility of seeing a recovery in the dollar index in the near term. A bounce to 92 or 92.5 is likely as long as the index stays above 91. Such a bounce-back move in the dollar index may cap the strength in the rupee in the near term. As such the rupee can test 64 in the near term. A fall below it can take it lower to 64.3. A further break below 64.3 will see the rupee weakening to 64.50.

On the other hand, if the rupee manages to reverse higher from 64, it can test 63.8 — a key near-term resistance, again. A strong break above this hurdle can take the rupee higher to 63.6 and 63.55. The region between 63.6 and 63.55 is a strong resistance. Whether the rupee breaks above 63.55 or not will then decide the next trend.