The rupee dipped on Monday as month-end dollar bids from importers exerted some pressure, but the currency largely sidestepped the spillover from a firmer dollar, which traders indicated was due to the absence of substantial outflows.
The rupee closed at 86.6650 against the U.S. dollar, 0.2% down from its close of 86.5150 in the previous session.
While the rupee was trading marginally stronger in the first half of the session, it reversed course in the latter half as the dollar index rose. Asian currencies were a tad lower on the day, with the offshore Chinese yuan down by 0.1%.
The rupee is "only reacting to flows" over recent sessions, and has found some support above 86.60, a trader at a state-run bank said, pointing to price action driven by foreign portfolio flows and corporate activity.
Benchmark equity indexes, the BSE Sensex and Nifty 50 fell 0.7% and 0.63% on the day, respectively, diverging from gains in most regional equities.
The country's benchmark 10-year bond yield, meanwhile, ticked up to 6.3603%.
Equities in Europe were mostly higher while the euro fell, after the U.S. and EU reached a trade agreement over the weekend and investors welcomed the deal with cautious optimism.
The euro's recent price action "likely reflects more general U.S. dollar sentiment that was improving toward the end of last week, and we suspect (the sentiment) could extend further this week as investors’ optimism over the U.S. economy improves," MUFG said in a note.
U.S. economic data, including the closely watched non-farm payrolls report, will be in focus as investors gauge how far the optimism extends.
The Federal Reserve, meanwhile, will deliver its policy decision on Wednesday and is widely expected to keep rates unchanged. Interest rate futures are currently pricing in a little over 60% chance of a rate cut in September, per CME's FedWatch tool.
