Rupee to Weaken After Strong US Jobs Report Boosts Dollar and Yields

MUMBAI, July 4 (Reuters) – The Indian rupee is set to open weaker against the US dollar on Friday, weighed down by stronger-than-expected US jobs data that has triggered a rally in the dollar and lifted US Treasury yields.

According to traders, the one-month non-deliverable forward (NDF) market pointed to an opening in the 85.46 to 85.50 range, compared to the 85.31 close in the previous session.

The Jobs Report: Rare Good News for the Dollar

US non-farm payroll data released on Thursday surprised on the upside, showing job growth exceeding forecasts in June. The unemployment rate also dipped unexpectedly, indicating continued resilience in the US labour market.

This strong labour report is a “rare piece of good news” for the US dollar, which has recently faced selling pressure on expectations that the Federal Reserve might cut rates as early as July.

According to Richard Potts, economist at FX advisory firm Bondford, “The data reduces the likelihood of the Fed cutting rates at the July meeting, maintaining the rate advantage the US has over other major economies.”

Treasury Yields Rise, Supporting the Dollar

US Treasury yields climbed following the data. Higher yields make US assets more attractive to investors, supporting demand for the dollar against major peers such as the euro, yen, and emerging-market currencies, including the Indian rupee.

The 10-year US Treasury note yield rose to 4.35%, reflecting the market's repricing of Federal Reserve policy expectations. Just days earlier, Fed Chair Jerome Powell had kept the door open for a rate cut in July, which had weighed on the dollar. The jobs data has now shifted the balance in favour of holding rates steady, at least for now.

USD/INR Technical Levels: Key Support at 85.30

Currency dealers in Mumbai flagged 85.30 as a key support level for the USD/INR pair. The stronger US jobs data has reinforced expectations that this level is unlikely to be breached to the downside soon.

A dealer at a Mumbai-based bank commented: “The dollar’s broad recovery and the US yield move have locked in that floor for now.”

The rupee had closed at 85.31 on Thursday, and the overnight NDF market indicated a weaker opening. With the dollar index moving higher to 97.01, the rupee remains vulnerable to further losses.

Broader Market Context and Risks

The global foreign exchange market is closely watching US economic data to calibrate expectations for Fed policy. The Fed's decision has a direct bearing on global capital flows, emerging-market currencies, and bond yields.

Stronger US data reduces the chance of near-term rate cuts, which:

• Supports the dollar.

• Puts pressure on currencies like the rupee.

• Increases foreign investors' demand for US assets.

This environment can trigger capital outflows from emerging markets as investors seek better returns in the US.

India-Specific Factors

Beyond global drivers, local market factors also affect the rupee:

• Onshore one-month forward premium was quoted at 10 paise, reflecting the cost of hedging future rupee-dollar exposure.

• Foreign investors sold a net $87.2 million worth of Indian shares on July 2, and $158.6 million worth of Indian bonds, according to NSDL data.

• Regulatory action saw India’s market regulator bar US trading firm Jane Street from accessing the local securities market, raising questions about short-term flows.

These factors add to the near-term bearish pressure on the rupee.

Crude Oil Prices Offer Some Relief

One partial offsetting factor is crude oil prices, which remain subdued. Brent crude futures fell 0.4% to $68.5 per barrel, helping ease India’s import bill and trade deficit pressures.

Since India imports over 80% of its crude requirements, lower oil prices support the rupee by:

• Improving the trade balance.

• Reducing dollar demand from oil companies.

• Containing inflationary pressures.

Political Context in the US: Spending Bill Passed

In parallel, the Republican-controlled House of Representatives narrowly passed President Donald Trump’s new spending and tax cuts bill, estimated to add $3.4 trillion to the already large $36.2 trillion US national debt.

Market watchers are debating how much of this fiscal stimulus is already priced in and its long-term implications for Treasury yields and the term premium on the yield curve.

According to Chris Weston, head of research at broker Pepperstone, the longer segment of the Treasury curve needs to be tracked carefully for any rise in the term premium before making directional calls.

What Traders Are Watching Next

Currency traders and analysts will closely monitor:

• Further US economic data, especially inflation (CPI) and retail sales, for clues on the Fed’s path.

• Statements from Fed officials clarifying their policy stance post-jobs report.

• Global risk appetite, including equity market moves, which affect capital flows into emerging markets.

• India’s own macro data, including inflation, trade, and growth numbers, to gauge rupee fundamentals.

Outlook for the Rupee

Most short-term forecasts see the rupee under pressure as long as:

• The dollar remains strong.

• US yields stay elevated.

• Fed rate cut expectations remain subdued.

However, structural factors still support a relatively stable medium-term outlook, including:

• India’s solid growth trajectory.

• Efforts to attract foreign direct investment (FDI).

• Healthy foreign exchange reserves.

In the near term, however, the rupee faces a weaker bias, with 85.30 serving as a key support level in the USD/INR pair.

Conclusion

The Indian rupee is likely to open weaker on Friday, following stronger-than-expected US jobs data that boosted the dollar and Treasury yields. This data has reduced market expectations of an imminent Federal Reserve rate cut, reinforcing dollar strength globally.

Traders in Mumbai expect the USD/INR pair to trade in the 85.46–85.50 range initially, with 85.30 acting as a key technical support.

While lower crude oil prices offer some cushion, foreign portfolio outflows and strong US economic data will likely weigh on the rupee in the short term.

For policymakers, the focus will remain on maintaining macroeconomic stability, managing capital flows, and ensuring inflation remains under control, even as the global backdrop becomes more challenging.

This evolving situation highlights the interconnected nature of global economics, where a single US jobs report can shift expectations, influence central bank policy paths, and directly impact currencies like the Indian rupee.

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