INDIA RUPEE-Fed comments weigh on dollar, set stage for slight rupee upside

By Nimesh Vora

MUMBAI, May 21 (Reuters) - The Indian rupee is set to open marginally higher on Wednesday, buoyed by a decline in the U.S. dollar after Federal Reserve officials adopted a cautious tone on the U.S. economic outlook.

The 1-month non-deliverable forward indicated an open in the 85.56–85.58 range, compared to 85.6350 in the previous session.

The rupee is likely to move marginally higher, if at all, on the back of the weakness in the dollar, a currency trader at a bank said, noting that recent upticks in the currency have consistently fizzled out amid incessant dollar demand.

The dollar index USD= dropped 0.4% on Tuesday and extended losses in Asian trading, falling below the key 100 handle. The fall boosted Asian currencies, which rose between 0.1% and 0.4%.

Comments from Fed officials on Tuesday reinforced concerns around the U.S. economic outlook amid uncertainty tied to President Trump’s trade policies.

St. Louis Fed President Alberto Musalem warned that despite recent cooling in U.S.-China trade tensions, the U.S. labor market is likely to weaken and prices could increase. Atlanta Fed President Raphael Bostic said the U.S. economy may be on the brink of a price-hike wave.

Long-term U.S. Treasuries sold off, pushing the 10-year yield back to the 4.50% level, while short-maturity yields were broadly unchanged.

The further steepening of the yield curve possibly reflected concerns about the U.S. fiscal outlook and higher inflation, MUFG Bank said in a note.

"There is possibly fading market confidence towards US trade and fiscal policies," it said.

Trump is urging fellow Republicans in Congress to rally behind a sweeping tax-cut proposal, which, if passed, could heighten concerns over U.S. fiscal policy.

KEY INDICATORS:

** One-month non-deliverable rupee INRNDFOR= forward at 85.72; onshore one-month forward premium at 14 paise

** Dollar index =USD down at 99.70

** Brent crude futures LCOc1 up 1.6% at $66.4 per barrel

** Ten-year U.S. note yield at 4.51%

** As per NSDL data, foreign investors bought a net $109.7mln worth of Indian shares on May. 19

** NSDL data shows foreign investors sold a net $62.2mln worth of Indian bonds on May. 19