Rupee ended higher, Pound higher vs. Dollar

Tuesday,   04-Oct-2022   04:04 PM (IST)

The Indian rupee ended the session higher at 81.52/53 levels compared to its opening at 81.67/68 levels after touching the high of 81.35/36 levels as a sharp decline in US Treasury yields stoked a rally in global equities and dampened demand for the dollar. Rupee traded in the range of 81.35-81.68 levels today. The rupee's performance today was broadly in line with its Asian peers. Asian equities surged and futures indicated a more than 1% rally for U.S. shares. The fall in US Treasury yields helped engineer a turnaround in risk sentiment. Indian government bond yields declined for the first time in five sessions with the 10-year yield posting its biggest drop in one-and-a-half months, tracking a similar move in U.S. peers. A global rebound in market sentiment propelled domestic equities higher today. The S&P BSE Sensex gained 1,277 points, or 2.25 per cent, to settle at 58,065. The Nifty50 shut shop at 17,274, up 387 points or 2.29 per cent. In the forward segment 1mth, 3mth and 6mth annualized premia ended the day at 3.42%, 3.12% and 2.90% respectively.

The U.S. dollar retreated with risk sentiment on the rise, while sterling retained its recent gains after the U.K. government’s policy U-turn. Traders are beginning to wonder if the slowdown visible in the U.S. and world economies will force the Federal Reserve to adjust its rate-hiking trajectory lower. This has driven a sharp rally in government bonds over the last week, driving benchmark Treasury yields down all along the yield curve, a move which has continued Tuesday. The pound rose for the sixth consecutive session on Tuesday as investors welcomed the British government’s U-turn on some tax cuts and the U.S. dollar slipped. Sterling was last up at $1.1365, after touching a session high of $1.1428. Sterling dropped to a record low of $1.0327 on Sep. 26 after new Finance Minister Kwasi Kwarteng unveiled plans to slash taxes, particularly for the rich, and ramp up borrowing. But markets’ dire reaction and a likely revolt by his own lawmakers forced Kwarteng into a U-turn on Monday. He dropped plans to get rid of the 45% top rate of income tax, one day into the ruling Conservative Party’s annual conference. The pound had already rebounded from its record low after the Bank of England (BoE) intervened in the bond market last week following a dramatic plunge in long-dated gilts. It has now regained all the ground it lost in the wake of Kwarteng’s so-called mini budget. The U.S. dollar index fell 0.18% to 111.35 following a drop in U.S. Treasury yields. U.S. yields, which move inversely to prices, fell after survey data showed the U.S. manufacturing sector slowed in September. The yield on the benchmark 10-year U.S. Treasury was down around 7 basis points on Tuesday to 3.585%, after rising above 4% last week. The Bank of England’s intervention last week also pulled global bond yields lower. The pound has fallen more than 16% this year as the dollar has surged on the back of the U.S. Federal Reserve’s aggressive rate hikes, and as doubts have mounted about the UK’s economy and policies. The dollar index has risen more than 18%, with higher interest rates making U.S. assets look more attractive. Yields on the benchmark UK 10-year government bond fell more than 10 basis points to 3.829% as investors continued to digest Kwarteng’s U-turn and the BoE’s bond purchases. Britain sold 2.5 billion pounds ($2.84 billion) of a 40-year benchmark gilt maturing in 2061 at an average yield of 3.371% on Tuesday, the highest yield for any gilt sold at auction since 2014, suggesting investors have demanded steep discounts to buy long-dated UK debt.