MUMBAI, June 26 (Reuters) - The Indian rupee strengthened alongside regional peers on Thursday as the dollar was weighed down by concerns over the independence of the U.S. Federal Reserve and a pullback in geopolitical risk premium.
The rupee rose nearly 0.4% to 85.74 as of 11:40 a.m. IST, broadly in line with gains seen among Asian peers.
The offshore Chinese yuan was perched near its strongest level since Donald Trump's victory in the U.S. elections, while the dollar index hovered near a three-year low.
The euro and the Swiss franc climbed to multi-year highs against the greenback as investors fretted over the independence of the U.S. central bank following Trump's remarks on Chair Fed Powell.
Trump on Wednesday called Powell "terrible" for not lowering interest rates sharply.
While Powell has urged a cautious approach on policy rates, markets are now pricing a near 25% chance of a rate cut in July, up from 12% a week earlier, according to CME's FedWatch tool.
The heightened rate cut odds have also helped lift dollar-rupee forward premiums, with the one-year implied yield rising to a near one-month peak of 2.02% before paring gains.
On the day, traders pointed to broad-based interbank dollar sales, which helped lift the rupee.
FX strategists at DBS see "the scope for USD/INR to consolidate in an 84-86 range with a downside bias, aligning with its historical tendency to regain equilibrium after sharp currency movements," the firm said in a note.
The rupee had weakened to a low of 86.8925 last week as the conflict between Iran and Israel deepened, but has pared losses since a ceasefire helped cool oil prices.
Brent crude oil futures were last quoted at $67.8 per barrel, down nearly 12% on the week.
Reporting by Jaspreet Kalra; Editing by Anil D'Silva
Source: Reuters