Rupee slips 26 paise to 69.32 vs dollar in early trade; market sentiment takes a hit after US imposes additional tariffs on Chinese goods

The rupee on Friday declined by 26 paise to 69.32 against the US currency in early trade, due to strong dollar demand from banks and importers amid unabated foreign fund outflows. Forex traders said market sentiment took a hit after the US announced additional 10 percent tariff on $300 billion in Chinese goods. President Donald Trump on Thursday announced that the US will impose an additional 10 percent tariff on $300 billion in Chinese imports, and accused China of not being serious in arriving at the trade deal and failing to keep its promise to buy more American agricultural products. The new tariffs would hit a wide swathe of consumer goods from cell phones and laptop computers to toys and footwear, at a time when the manufacturing sector is already reeling from the accumulative impact of the trade war, Reuters reported. In a series of tweets, Trump said the new tariff, in addition to the 25 percent on goods worth $250 billion that was previously in place, would come into effect from 1 September.

Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

...buy agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said that he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die! Trade talks are continuing, and...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

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...during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%...

— Donald J. Trump (@realDonaldTrump) August 1, 2019

At the Interbank Foreign Exchange, the rupee opened at 69.26 then fell to 69.32 against the US dollar, showing a decline of 26 paise over its previous closing. The rupee on Thursday had closed at 69.06 against the US dollar. Traders said strengthening of the greenback vis-a-vis other currencies overseas, a weak opening in domestic equities and foreign fund outflows also weighed on the local unit. [caption id=“attachment_5153451” align=“alignleft” width=“380”]  Representative image. FP photo[/caption] Foreign institutional investors (FIIs) remained net sellers in the capital markets, pulling out Rs 1,056.55 crore on Thursday, provisional data with the exchanges showed. The 30-share index was trading 330.96 points or 0.89 percent lower at 36,687.36 and the broader Nifty fell 101.65 points or 0.93 percent to 10,878.35. The dollar index, which gauges the greenback’s strength against a basket of six currencies, inched up 0.05 percent to 98.41. Brent crude futures, the global oil benchmark, climbed 2.51 percent to $62.02 per barrel, PTI report said. The 10-year government bond yield was at 6.33 percent in morning trade. Meanwhile, the yen edged up to 107.06 on the dollar after rising 1.3 percent overnight, its biggest daily gain in more than two years. The euro also recovered to $1.1075, from a two-year low of $1.1027 hit in US trade. In contrast, the risk-sensitive Australian dollar dropped to a seven-month low of $0.6795 while the yuan slid to its weakest since November 2018, softening by over 0.7 percent to 6.95 per dollar in onshore trade and fell to 6.9563 in the offshore market. The 10-year US bond yield fell almost 12 basis points on Thursday to 1.902 percent, hitting the lowest level since Nov. 8, 2016, when Trump won a surprise victory in the presidential election. The 10-year yield extended its slide to as low as 1.875 percent in Asian trade.

Trump’s decision has thrown the Federal Reserve another curveball that may force it to again cut interest rates to protect the US economy from trade-policy risks after its first rate cut in more than a decade on Wednesday.

Although Fed Chairman Jerome Powell said the rate cut was a “mid-cycle adjustment” and not a start to a full-blown rate-cutting cycle, markets aren’t fully convinced. The October Fed funds rate futures have jumped to now fully price in a rate cut in September, compared with only around 60% before the tariff announcement. Another 25 basis point move is priced in by December. “In the grand scheme of things, it will become clearer and clearer that the Federal Reserve has started an easing cycle and will have no choice but to cut rates further,” said Akira Takei, fund manager at Asset Management One.