Fed Minutes Loom: Dollar Steady, Rupee Falls

Introduction

As 2025 closed, forex desks traded cautiously. A subdued end to the year—characterized by light liquidity and thin order books—left the U.S. dollar largely unchanged ahead of the Federal Reserve’s December minutes. At the same time, the Indian rupee finished the year as one of Asia’s weakest currencies after significant capital outflows and targeted intervention by the Reserve Bank of India (RBI). This article summarizes the immediate headlines, explains why they matter, and outlines near-term implications for traders and corporates.

Fed Minutes, Light Liquidity: Why the Dollar Held Firm

Thin year‑end trading amplified the importance of any scheduled policy release. With institutional volumes lower than normal, the dollar’s movements were muted: major pairs traded inside narrow ranges as participants awaited the Fed minutes for guidance on the path for U.S. rates.

What the minutes could reveal

• Degrees of policy disagreement among Fed officials — whether the committee leaned toward further tightening, holding steady, or easing in 2026.
• Assessment of inflation momentum and labor market resilience — critical inputs for rate expectations that drive currency flows.
• Timing and size of any prospective adjustments, which can trigger rapid repricing in FX when liquidity is thin.

Because trading volumes were light, even modest shifts in tone or language in the minutes could produce outsized moves. In practical terms, dollar pairs like USD/JPY and EUR/USD became more susceptible to abrupt swings once market participants digest the minutes.

Indian Rupee: Underperformer in Asia

The rupee underperformed through 2025, finishing the year roughly 4.7% weaker versus the U.S. dollar and settling near ₹89.9 per USD. Two primary drivers explain the rupee’s relative weakness:

Capital outflows and external pressures

Investors pulled about $18 billion from Indian equities during the year, and India recorded a sizeable balance‑of‑payments shortfall of approximately $22 billion between April and November. Those pressures reduced inward dollar supply and increased the need for policy action to stabilize the exchange rate.

RBI policy response and market effects

The RBI allowed more exchange‑rate flexibility while stepping in selectively to smooth excessive volatility. Authorities supported domestic bond markets via large open‑market operations and FX swaps, injecting roughly ₹11.7 trillion (about $130 billion) into the financial system. Even with this intervention, the 10‑year government yield ended the year near 6.59%—only modestly lower—signaling that policy tools provided limited relief on yields and currency stress.

On the positive side, India’s real effective exchange rate (REER) fell from about 104.7 to 97.5 over the period, indicating the rupee is now somewhat cheaper in trade‑weighted terms—an advantage for exporters if global demand holds.

Immediate Implications

For FX traders

• Expect heightened intraday volatility around the Fed minutes release. Keep position sizes conservative given year‑end illiquidity.
• Pairs involving the dollar could gap or spike; use execution tools (limit orders, staggered entries) to reduce slippage risk.

For corporates and importers/exporters

• Indian exporters may find a modest competitive edge from the weaker REER, while importers face higher costs at current spot levels.
• Hedging strategies should account for potential volatility in the first trading sessions after the minutes; consider rolling or layering hedges rather than large one‑off locks.

Conclusion

The near‑term direction for currencies hinges on the tone of the Fed minutes and how much risk appetites return once liquidity normalizes. The dollar’s stability ahead of the release reflects a wait‑and‑see stance; the rupee’s year‑end weakness reflects tangible capital outflows and external imbalances despite substantial RBI support. Traders and corporate treasuries should prioritize execution discipline and scenario planning as markets move into 2026.