(Reuters) - The Indian rupee is expected to open higher against the dollar on Monday, extending a rally from the previous week, as market participants bet that the U.S. Federal Reserve will downshift to smaller-sized rate hikes.
The rupee is tipped to open at around 80.65-80.70 per dollar, up from the previous session's close of 80.7950. The local currency jumped 2% last week in its best gain in almost four years.
The momentum is clearly in favour of the rupee, but "it makes little sense" in term of risk reward to chase the USD/INR pair lower from these levels, a trader at a Mumbai-based bank said.
The rupee has already corrected more than 3% from record lows and "then you have to consider oil prices", the trader said.
Asian currencies began the week on a positive note, keeping up the momentum fuelled by softer-than-expected U.S. inflation data. The data has prompted traders to calibrate again the pace of Fed rate hikes.
Traders reckon that it's now highly likely that the U.S. central bank will raise rates by 50 basis points next month. In the last four meetings, the Fed had raised rated by 75 bps each time.
However, one Fed official looked to push back against bets of the U.S. central bank turning too dovish.
The Fed may consider slowing the pace of rate increases at its next meeting but that should not be seen as a "softening" of its battle against inflation, Fed governor Christopher Waller said on Sunday.
Treasury yields rose on Monday and the dollar index witnessed a slight recovery after last week's sell-off.
Meanwhile, oil prices inched higher on hopes of increased demand from China. Brent crude rose 3.5% over the previous two sessions.
Asian shares were mixed, while U.S. equity futures were marginally lower after Friday's advance.