The rupee weakened sharply against a rampant dollar, driven by a broad sell-off in global markets after a significant surge in bets on a Federal Reserve jumbo rate hike on the back of higher-than-expected inflation statistics.
Asian stocks, bonds and currencies plunged as the dollar climbed close to a 24-year high against the yen on Wednesday amid a jump in US interest rates.
PTI reported that the rupee fell 41 paise to 79.58 against the US dollar in early trading.
Bloomberg quoted the Indian currency at 79.5887 per dollar after weaker opening at 79.6037, compared to its previous closing of 79.1475.
After leaping to a 15-year high, rising as much as 22 basis points, two-year US Treasury yields, which are the most susceptible to policy changes, continued to rise to more than 30 basis points above the benchmark during trading hours in Asia. 10-year yield and deepening an inversion, which is typically a recession warning.
The turnaround in global financial markets after the recent bull run cast a dark shadow over the debate over the outlook for the global economy and markets. The latest Bank of America Corp. survey. found that the number of investors expecting a recession has reached its highest since May 2020, Bloomberg reported.
According to data from the Labor Department, the US consumer price index rose 0.1 percent from July, after being unchanged in June. Prices rose 8.3 percent from a year earlier, a modest slowdown but still higher than general expectations of about 8 percent.
That set fire to the Federal Reserve’s rate hike expectations during its September meetings and beyond.
“This really shattered the illusion… that inflation had peaked and was on the decline,” Ray Attrill, head of currency strategy at National Australia Bank, said in a podcast. “That’s why the markets have decided that next week’s Fed decision is not between 50 and 75 (base point increase), but now between 75 and 100.”
Money markets are currently forecasting a 63 percent chance of an additional 75 basis points and a roughly 37 percent chance of a full percentage point increase on Sept. 21.
Reuters reported that Nomura economists also said they now believe a 100 basis point rate hike is the most likely outcome.
“Markets are underestimating how entrenched US inflation has become and the magnitude of the response likely to be needed from the Fed to drive it out,” Nomura’s economists wrote in a note.
The dollar index, which compares the value of the greenback against six major currencies, including the yen, the euro and the pound sterling, has changed little at 109.750, after rising 1.44 percent overnight, its biggest gain in a single day since March 2020.
“The dollar is crying out for overvaluation, but to see that as correct you need some kind of catalyst for a cyclical dollar decline, and these latest developments have challenged that,” NAB’s Mr. Attrill to Reuters.
The dollar’s strength weighed on Asian currencies.
The Korean won fell 1.5 percent on the king’s dollar and the yen moved dangerously close to the crucial level of $145 to dollar. The government does not rule out any possibility of responding to changes in the foreign exchange market, according to Japan’s top foreign exchange official.
Bloomberg reported that China expanded its currency defense by setting its reference rate for the yuan with the strongest bias ever.
The People’s Bank of China (PBoC) has set the daily reference rate for the yuan at 6.9116 per dollar, compared to the record 454 pips last Wednesday. 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 dollar-denominated debt burden. “Only China can afford to defy this global trend of rate hikes by sticking to its easing policy.”