MUMBAI: The Indian rupee declined on Monday alongside Asian currencies, as investors turned to safe-havens such as the U.S. dollar amid escalating tensions in the Middle East, although a retreat in crude oil prices helped cushion their losses.
Market participants remained focused on Iran’s response to U.S. attacks on its nuclear sites.
The rupee closed at 86.75 against the U.S. dollar, down 0.2% from its close at 86.5850 in the previous session.
Brent crude oil futures hit a five-month peak of $81.40 per barrel earlier in the day but pared gains to be last quoted at $77.4 per barrel.
Iran has repeatedly threatened to retaliate after the U.S. struck the county’s nuclear sites over the weekend, raising fears that the retaliation may include a closure of the Strait of Hormuz through which roughly a fifth of global crude supply flows.
The dollar index was up rose nearly 0.4% to touch a near-two week high of 99.4 while Asian currencies were down between 0.2% and 1.4%.
In case the “geopolitical risk and oil spike proves to be only temporary, we think markets will rapidly default back to preferring strategic USD shorts on the back of US-generated bearish drivers,” ING Bank said in a note.
Global investors treaded with caution on Monday, with most equity gauges in Asia and Europe trading in the red but not suffering steep losses.
India’s benchmarks, the BSE Sensex and the Nifty 50 ended lower by about 0.6% each. U.S. equity futures, meanwhile, nudged higher.
The relatively muted reaction in oil prices is a source of comfort for the rupee, a trader at a state-run bank said.
However, a fresh round of escalation in the Middle East could push the rupee below the psychologically important 87 level, the trader added.
Market participants reckon that the Reserve Bank of India is likely to step in to curb excessive volatility spurred by geopolitical developments.
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