Rupee declines to one-week low of 95.95 as oil rally fans global rate hike worries

The Indian rupee plummeted to a one-week low of 95.95 against the US dollar on Thursday, as soaring oil prices and stalled U.S.-Iran negotiations stoked fears of further global interest rate increases. The slide was fueled by state-run banks selling dollars on behalf of the Reserve Bank of India, which prevented the currency from dropping below 96 per dollar.

By day's end, the rupee had slipped to 95.9550, marking a 0.2% decline for the day. The currency had previously dropped to its lowest level in over three months, 95.96, on September 17. The ongoing Iran conflict has had a detrimental impact on emerging market currencies, as rising oil prices fuel inflation in countries that import energy and strain fiscal budgets.

Moreover, a surge in global bond yields has intensified the pressure, with U.S. Treasury yields reaching multi-year peaks amid increased bets on Federal Reserve rate hikes. John Williams, the New York Federal Reserve President, suggested on Thursday that it could be prudent for the U.S. central bank to raise interest rates once more before the year's end to combat inflation concerns.

The dollar index showed a slight uptick, standing at 101, while Asian currencies experienced a decline ranging from 0.1% to 0.5%. Indian stocks, on the other hand, suffered their steepest single-day decline since early July. Market analysts have warned that periods of low foreign exchange volatility often culminate in a significant downturn, and the present market conditions suggest an increased risk of such an event unfolding.

High-yielding currencies in Asia, including the Indian rupee and Indonesian rupiah, are particularly vulnerable, with experts predicting the yen and Swiss franc to outperform. Despite these headwinds, the rupee's volatility expectations remain relatively low, with the 1-month implied volatility gauge currently hovering around 4%.