USD/INR seems to extend gains on Wednesday amid US-Iran war

The USD/INR pair ended Monday’s session 0.7% higher to near 92.00. The pair is expected to open higher on Wednesday, with Indian markets remaining closed on Tuesday due to Holi celebrations, as the US Dollar (USD) extends its gains.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.4% higher to near 99.00, the highest level seen in almost seven weeks.

The US Dollar is surging as its safe-haven demand has increased significantly amid the escalating war between the United States (US), Iran, and Israel.

In retaliation for the killing of Iran’s Supreme Leader, Ayatollah Ali Khamenei, Tehran’s top national security official, Ali Larijani, has vowed to avenge and has rejected the idea of negotiating with the US. As part of retaliation, Tehran has closed the Strait of Hormuz, a sea route from which 20% of global crude oil is shipped, and launched a series of drone attacks on the US Embassy in Riyadh.

On the domestic front, easing dovish Federal Reserve (Fed) expectations for the June policy meeting have also offered some strength to the US Dollar. The CME FedWatch tool shows that the probability of the Fed holding interest rates steady in the June policy meeting has increased to 53.5% from 42.7% seen on Friday.

Fed dovish prospects have receded after the release of the ISM Manufacturing PMI data on Monday, which signaled a sharp increase in factory-level inflation. The report showed that the sub-component Prices Paid – which tracks changes in prices paid for inputs such as labor and raw materials – soared to 70.5 against estimates of 59.5 and the previous reading of 59.0.

Rising oil prices due to the Middle East war are expected to weigh on the Indian Rupee (INR), given that the Indian economy relies heavily on imports of oil to meet its energy needs.

Meanwhile, the outflow of foreign funds from the Indian stock market on the first trading day of March is expected to elevate to burden the Indian Rupee. The data showed on Monday that Foreign Institutional Investors (FIIs) offloaded their stake worth Rs. 3,295.64 crore, according to NSE.