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Drop in US Treasury yields benefits Indian rupee

The Indian rupee edged slightly higher on Tuesday, and the dollar-rupee premiums increased as fears over the economic impact of U.S. president Donald Trump's tariff war pushed down the yields on U.S. Treasury bonds, the greenback, and crude oil.

The rupee was slightly higher at 86.2650 against the U.S. Dollar by 11:10 am IST than it had been when it closed earlier that day, at 86.2925.

In Asia, the dollar index remained at 97.9 after falling by 0.6% on Monday. This was due to a drop in U.S. Treasury rates that saw 10-year yields reach a two-week low.

The yields on short-term U.S. Treasury bonds also declined, helping to boost the premiums for long-term dollar-rupee forwards.

The implied yield on the 1-year dollar rupee rose to a two-week-high of 2.03%. A fall in rupee liquidity in the banking system also helped boost very near-tenor swap rates.

Indian assets mostly ignored a media report stating that a deal between India and America is unlikely to be reached before August 1. Equities and rupee held on to modest gains, while the yield of the benchmark 10-year bonds was barely changed.

Next month, India will face steep reciprocal levies for exports to the U.S. in the absence a deal.

The rupee's trajectory is still pointing towards further weakness. Both the 86.00 level and the 86.20 level have been breached. Amit Pabari said that this opens the way for a move towards 86.50 to 86.80.

The rupee has also suffered from a lack of foreign portfolio flows, in addition to the uncertainty surrounding global trade dynamics.

In July, overseas investors sold a net of about half a million dollars worth of local stocks. The outflows for the year to date are at almost $9.5 billion. (Reporting and editing by Ronojoy Mazumdar; Jaspreet K. Kalra)

(source: Reuters)