Rupee set to strengthen amidst US treasury yield retreat

The rupee is expected to rise further on Thursday following a pullback in US Treasury yields on weak economic data.

Non-deliverable forwards indicate the rupee will open at around 82.58-82.60 to the US dollar, compared with its close of 82.6850 in the previous session.

The rupee, on Wednesday, had its best session in more than two months after the Reserve Bank of India asked some banks to not initiate new outright NDF arbitrage positions.

The "hangover from yesterday alongside the fall in US yields" will "ensure a decent session" for the rupee, a forex trader at a Mumbai-based bank said.

"If the rupee does manage to add to, or at least hold on to, yesterday's rally, you would have to say the near-term outlook has turned favourable."

US business activity hits stagnation

The selloff in the US Treasuries halted following disappointing data. US business activity approached the stagnation point in August, with growth at its weakest since February, with demand for new business in the vast service sector contracting.

"The data indicate both manufacturing and services are contracting. Leading indicators of future activity suggest weakness lies ahead," ANZ said in a note.

The weak Eurozone flash composite PMI data provided another reason for investors to buy bonds.

"In recent months, the PMI has painted a worsening picture of eurozone activity, and August data are no different." ING Bank said in a note.

The dollar index fell by the most in more than two weeks on Wednesday. Asian currencies were mostly higher, with the Korean won leading the way.

The drop in US Treasury yields boosts risk appetite. The S&P 500 index rose 1 per cent and futures pointed to the index adding to the rally. Asian shares advanced.