The rupee strengthened on Friday as Asian currencies benefited from a weaker US dollar, as the odds of a blockbuster Federal Reserve rate cut next week increased after media reports said the decision was likely to be a close one.
The rupee closed at 83.8875 against the US dollar, down from its close of 83.9650 in the previous session.
The currency strengthened nearly 0.1 percent week on week, its best weekly performance since the week ending June 25.
The dollar index fell below the 101 level on Friday and was down 0.2 percent on the day, while the Korean won and Malaysian ringgit led gains among Asian currencies.
Wide interbank dollar offers helped the rupee on Friday, but 83.85 remains a strong resistance level for the currency, said a foreign exchange trader at a state-run bank.
The chances of a 50-basis-point rate cut by the Fed rose to 43 percent from 14 percent the day before, sending U.S. bond yields lower.
The odds increased after reports from the Wall Street Journal and the Financial Times said a massive rate cut remains an option.
Dollar Rupee term premiums benefited from the decline, with the one-year implied yield rising 5 basis points to 2.28 percent, its highest level in 16 months.
“Unless the Fed surprises with an aggressive cut, we think even a moderate 25 basis point move (i.e. signalling further easing and perhaps 50 basis point cuts in the future) may prevent a sustainable dollar recovery,” ING Bank said in a note.
Investors will also be keeping an eye on the Bank of Japan’s (BOJ) interest rate decision on Friday, where it is expected to keep rates steady at 0.25 percent.
The BOJ’s rate hike in July had triggered a rally in the yen, leading to a reversal of global carry trades, creating volatility in financial markets.
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