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The rupee is gaining ground on regional currencies, but the focus remains on tariffs.

The Indian rupee showed modest gains on Tuesday as it tracked the strength of regional peers. Markets looked past the White House tariff letters, and instead took comfort in the extension of the deadline to August 1, which leaves room for agreements to be made.

The rupee closed the session at 85.65 against the U.S. Dollar, an increase of about 0.2% compared to its previous close of 85.85.

The market reaction to U.S. president Donald Trump sending letters to 14 trading partners with sharply increased tariffs on imported goods into the United States has been largely muted. Most regional currencies and equities gained on Tuesday.

While South Korea received a notice declaring a 25 percent tariff, the won gained 0.7% against the US dollar, and the KOSPI index rose nearly 2%. This was the best day for the KOSPI in the past two weeks.

India's benchmark equity indices also posted modest gains. Since U.S. tariffs on reciprocal imports were announced in April, local equities have kept up with regional stock indexes. However, the rupee underperformed other emerging markets despite the general weakness of the dollar.

In a recent note, ING stated that "the market appears to believe that nothing is definitive and that these letters are merely another step on the road towards a deal".

A trader from a private bank stated that the local currency was supported on the day by modest dollar interbank sales, as well as positive signals from gains in regional currencies.

The rupee will likely remain rangebound in the short-term, but the announcement that a trade agreement with the U.S. has been signed could allow for a move towards 85.

As traders reduced their bets on rate reductions by the U.S. Federal Reserve, dollar-rupee premiums also declined. The implied yield on the 1-year dollar-rupee fell 4 basis points to 1.95 percent.

(source: Reuters)