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The rupee fell initially in the past week. But the negative sentiment was short-lived and, as expected, the currency regained strength in the latter part of the week. The rupee fell to a low of 63.84 on Wednesday last week and then reversed higher. It rose to a high of 63.33 on Monday before closing at 63.49.
Weakness in the US dollar coupled with the Indian benchmark indices surging to record highs helped the rupee gain momentum.
Dollar slumps
It was a volatile week for the US dollar. After hovering above 92 for most part of the week, the dollar index fell sharply breaking below 92 on Friday to test 91. The sell-off in the dollar index continued on Monday as well.
The index has declined below 91 and is currently trading at a three-year low of 90.60, down 1.5 per cent from around 92 last week.
Increasing talks in the market on the possibility of the European Central Bank (ECB) tapering its stimulus in its meeting this month has triggered a sharp rally in the euro and, in turn, a strong sell-off in the dollar. The euro has surged about 2.7 per cent from around 1.1915 to the current levels of 1.2245.
The outlook for the dollar index remains negative. There is room left for the index to fall to 89.9 or even 89.6, which can aid in keeping the rupee stronger. Whether or not the dollar index manages to reverse higher from the 89.9-89.6 supports will then determine the next move.
An upward reversal from these supports can trigger a relief rally to 91 or even higher levels. But if the dollar index breaks below 89.6 decisively, it will increase the possibility of the fall extending to 88.
Rupee outlook
The near-term outlook for the rupee remains bullish. The currency can strengthen towards 63 in the near term. A break above the near-term resistance level of 63.25 will drag the currency towards 63.
Inability to break above 63 can pull the currency lower again to 63.25 and 63.5. In such a scenario, a range-bound move between 63 and 64 can be seen for some time.
But if the rupee manages to breach 63 decisively, it can strengthen further towards 62.8 and 62.7 against the dollar. This move is possible if the dollar index declines, breaking below 90 in the coming days.
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