US Dollar weakness fuels further Indian Rupee gains

• Following Tuesday’s holiday, the Indian Rupee rallies sharply against the US Dollar.
• The US Dollar faces pressure from AI growth concerns and a reassessment of Fed policy expectations.
• Support for the Indian currency remains a priority for the RBI.

Near 96.30, USD/INR marks a fresh six-week low. The Indian Rupee (INR) opens sharply stronger against the US Dollar (USD) on Wednesday, following the previous day’s holiday, as the US currency continues to underperform.

At around 101.77, the US Dollar Index (DXY) is almost unchanged at the time of writing. The index, which measures the Greenback against six major currencies, remains near the almost three-week low of 101.50 reached the previous day.

Weakness in United States (US) Artificial Intelligence (AI)-related shares and a correction in US bond yields amid a reassessment of Federal Reserve (Fed) policy expectations have put the US Dollar under pressure. Market participants expect these headwinds to drive further losses in the currency.

USD faces further losses on Fed repricing and tech concerns

Last week’s “heavy net losses for the DXY” underpin Scotiabank strategists’ view that “broad USD weakness looks poised to extend in the short run as markets reassess near-term Fed tightening risks,” with the losses indicating that the “Sep/Oct rally in the index is poised to correct or reverse, potentially towards the 100.80/101.30 area at least.” The strategists also warn that “a deeper shake out in tech stocks could become a further headwind for the USD, given the dominance of the AI build out in the US growth/inflation narrative,” suggesting that fresh pressure on the sector may strengthen the Dollar’s current downward trend.

An unchanged policy rate at the Fed’s meeting later this month is now almost certain, according to the CME FedWatch tool. A month earlier, the tool indicated a meaningful probability of another rate increase at the October meeting. Traders scaled back hawkish Fed bets after several officials signalled no urgency for a further interest rate rise.

RBI reinforces multi-layered rupee defence

A combination of “outright intervention in spot/forwards, regulatory action, liquidity steps, administrative measures and moves to curb import-related dollar demand” forms the Reserve Bank of India’s (RBI) “multi-layered defence strategy to support the rupee this year,” economists at DBS Group Research note. DBS says the authorities are “likely not done yet and remain ready to take further action, as required,” a position reinforced by RBI Governor Malhotra in a recent interview. Highlighting the central bank’s commitment, he stressed that “The RBI is determined to do whatever is necessary to ensure orderly movement in the foreign exchange market.”

Despite these measures, multiple headwinds leave DBS sceptical about sustained INR gains. Referring to recent policy efforts to support the Rupee, DBS says that “we see limited room for sustained INR appreciation on grounds of manufacturing/trade competitiveness." The economists also point to the currency’s “high sensitivity to oil price movements and risk sentiments.” In their view, “a challenging portfolio flows outlook leaves the door open to further gradual rupee depreciation subject to global developments,” even after the recent support measures.

USD/INR Technical Outlook

At 94.5625 on the daily chart, USD/INR retains a bearish near-term bias. Spot remains well beneath the 20-period Exponential Moving Average (EMA) at 95.5079 following a sharp retreat from recent highs. Although the Relative Strength Index (RSI) reads 28.47, placing it in oversold territory, this signals stretched downside conditions rather than a clear recovery. Overhead trend resistance therefore continues to constrain price action.

The 20-period EMA near 95.51 provides immediate resistance, with any recovery likely to encounter fresh selling there. No clear price-based support has emerged near current levels. However, an oversold RSI around 28 suggests sellers could begin to lose confidence in further declines. Stabilisation above 94.56 would be needed to ease the risk of a prolonged fall.

(The technical analysis of this story was written with the help of an AI tool. Know more.)