The greenback strengthened against a basket of six major currencies after the European Central Bank (ECB) said it will leave interest rates unchanged until mid-2019. However, it decided to end its bond buying programme in December this year.
The ECB's dovish tone came in at a time when the hawkish US Fed hiked interest rate for the second time this year, with two more in the line for the remainder of the year, as suggested by the Fed's dot plot.
The euro tumbled. The dollar index, which compares the US currency with six major world currencies, including the euro, jumped.
At 12 pm, the rupee was at 68.02 against the greenback, down 38 paise.
What's fuelling the downtrend? Swelling current account deficit (CAD) and hardening inflation did no good to the domestic currency. Foreign capital continued to move out of the equity market. A further weakness in the rupee value looks likely.
Nirmal Bang Institutional Equities expects CAD to widen further to 2.6 per cent of GDP in FY19.
"The situation also looks dire with FPI flow – which was dominated by debt flow – reversing and the RBI turning a net seller of forex reserves. Nevertheless, accumulated reserves put the RBI in good stead. To add fuel to the fire, the Feds dot plot now indicates two more rate hikes in 2018. Rising US interest rates will accelerate flows from emerging markets (EMs) back to developed markets amid tightening liquidity," the brokerage said.
While a rate hike could be rupee supportive at the margin, a cocktail of rising CAD, more Fed rate hikes and rising inflation indicate that the pressure on the rupee is here to stay, the brokerage said.
Data showed wholesale price index (WPI) inflation for May rose to 4.4 per cent, up from 3.2 per cent in April, on the back of a surge in core inflation.
CAD for FY18 stood at 1.9 per cent of GDP against 0.6 per cent in the preceding year.