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 Perils of an ad hoc forex policy
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Rupee at near 2-month low on weak shares
November, 18th 2010

The Indian rupee weakened further on Thursday to touch near two-month lows on losses in local shares amid profit-taking by foreign funds ahead of the year-end, with dollar demand from oil importers also weighing.

But, the dollar's loss against majors could pull the rupee off its early lows, dealers said.

"The rupee should be in a consolidation mode. There is not much clarity on the dollar's weakness. (The) rupee should be supported at 45.50 as some selling (of dollars) may come in," said J. Moses Harding, head of global markets.

At 11.13 a.m. (0543 GMT), the partially convertible rupee was at 45.55/56 per dollar, after touching 45.58, its lowest since Sept. 24 and compared with 45.31/32 on Tuesday. The market was shut for a holiday on Wednesday.

The rupee is seen moving in the 45.30-45.60 band in the day, dealers said.

"The Asian currencies are weaker than Tuesday's close, though they are slightly up from yesterday. Rupee may cool off with the dollar losing. We have to watch the euro's strength against the dollar to gauge rupee's direction," said a dealer at a foreign bank.

Indian shares were down 0.7 percent, after a positive start, on sell-off in financial stocks.

The dollar's rally to seven-week highs stalled on Thursday after it failed at chart resistance and after subdued U.S. inflation data reinforced the Federal Reserve's case for easing, making dollar short-covering pause.

The dollar index, which tracks the greenback's performance against a basket of major currencies, was down 0.37 percent at 78.796 points, retreating from its seven-week high of 79.461 points.

Foreign fund inflows are seen tapering off as offshore investors begin to wind up their investments to avoid piling up risks close to the year-end, dealers said.

Foreign funds have bought shares worth a record $28.5 billion so far in 2010, compared with last year's $17.5 billion, helping the rupee gain 2.3 percent year-to-date.

Foreign funds sold $153.04 million of Indian stocks last Friday, the first outflow so far this month, data from the capital markets regulator shows. On Monday, they bought $116.6 million of Indian shares.

One-month offshore non-deliverable forward contracts were quoted at 45.81 to a dollar, weaker than the onshore spot rate, suggesting a bearish near-term outlook.

In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange closed at 45.6250, 45.6250 and 45.6300 respectively, with the total traded volume on the three exchanges at a moderate $2 billion.

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