Indian rupee fell to a fresh multi-month low on Wednesday as recession worries in Italy and rising geopolitical tensions in Ukraine and Middle East increased safe haven flows to the dollar.
Indian shares dropped tracking global bourses, and the benchmark share index Sensex ended 0.95% lower on the day. European stocks fell on Wednesday and the US stock futures too are down.
USD/INR rallied to as high as 61.41, its highest since early March, and from the previous close of 61.04. The pair has strengthened around 5.5% since gaining ground near an eleven-month low of 58.2 in late May.
Other Asian currencies like the Malaysian ringgit, Indonesian rupiah and Thai baht too have fallen against the dollar on Wednesday, showing the broader impact of safety-seeking flows into the greenback.
The broad dollar rally was also supported by stronger-than-expected ISM data from the US overnight.
Data on Tuesday showed that the US ISM non-manufacturing index had risen to 58.7 in July, its highest since March 2011. It compares with 56.0 in the previous month and street expectations of 56.3.
The USD index, the gauge that measures the greenback' strength against a basket of currencies on a trade-weighted basis, rose to an eleven-month high of 81.65 on the data, and the gaines have been extended on Wednesday.
The Reserve Bank of India kept the main policy rate unchanged and warned of rising inflation pressures in the country in the rate-setting meeting on Tuesday. The rupee ended down on that day.
"There are, however, upside risks (to inflation), in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints," RBI said on Tuesday.
"Accordingly, the upside risks to the target of ensuring CPI inflation at or below 8% by January 2015 remain, although overall risks are more balanced than in June," the central bank said.
Italian GDP declined 0.3% from a year earlier in the second quarter, data showed on Wednesday, while analysts were expecting a rebound to 0.1% growth, which would have marked its first positive reading since late 2011.
Italian GDP had bottomed out in late 2012 with a -2.8% reading and Wednesday's reading is the best since December 2011.
However, the sequential GDP growth rate came below the zero mark for the third straight quarter in Q2, theoretically pushing the country into recession.
The quarterly number was in the negative territory for about two years since 2011 December and saw positive numbers only once since then - in Q1 this year.
Reports that Russia has deployed more troops along the Ukraine boarder increased worries of fresh tensions in the region, turning investor attention towards safer assets like dollar and gold, weighing on currencies like rupee.
Gold rose to $1294.74 on Wednesday from Tuesday's close of $1288.20, further distancing from the 40-day low of $1280 touched on 31 July.
The USD/INR pair has bounced back through the 23.6% Fibonacci retracement of the August 2013 to May 2014 selloff and the nearest resistance level is 61.80, which seems an easy target now.
The pair will then aim 62.50 and 63.80 the next two Fibonacci levels.
On the downside, 60.0 is seen as the first support, where the 50-day moving average comes in on Wednesday. The next level will be 59.60 and then comes 58.90 ahead of a retest of the May low of 58.20.