Rupee seen higher after U.S. dollar drops on soft Fed outlook

MUMBAI (Reuters) - The Indian rupee is expected to open higher against the U.S. currency on Friday after U.S. data backed up expectations that the Federal Reserve will moderate its pace of rate hikes.

The rupee is likely to open around 81.10-81.15 to the dollar, compared with 81.2150 in the previous session. The local unit on Thursday reached 81 briefly.

It is not a surprise that the rupee's upside momentum is running into a challenge at the 81 level, a spot trader at a Mumbai-based bank said.

The USD/INR pair has multiple support levels between 80.50 and 81 and one can expect ample dollar demand in that region, the trader said.

The dollar index began December on the defensive after data signs that U.S. inflation was moderating and that manufacturing in the world's largest economy contracted last month.

The core personal consumption expenditures (PCE) price index rose 5.0% year-on-year in October, moderating from the 5.2% pace in the prior month. The core PCE is considered Fed's preferred inflation measure.

U.S. manufacturing activity contracted for the first time in 2-1/2 years, the Institute for Supply Management (ISM) said on Thursday.

The data added to the likelihood that, at its next meeting, the Fed will opt for a less-than-75-basis points rate hike that it has delivered in the last four meetings.

Fed Chair Jerome Powell had already signalled earlier this week, prior to Thursday's data, that the U.S. central bank could slow rate hikes.

Expectations regarding the peak Fed rate nudged lower.. The 2-year Treasury yield dropped to 4.25% and is now down about 60 basis points from its year-to-date highs.

The dollar index dropped to 104.56 overnight, its lowest since June.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 81.28; onshore one-month forward premium at 12 paisa

** USD/INR NSE Dec futures settled on Thu at 81.36

** USD/INR Dec forward premium at 9.3 paisa

** Dollar index at 104.82

** Brent crude futures up 0.3% at $87.2 per barrel

** Ten-year U.S. note yield at 3.54%

** SGX Nifty nearest-month futures down 0.3% at 18,921

** As per NSDL data, foreign investors bought a net $1,092.3 million worth of Indian shares on Nov 30

** NSDL data shows foreign investors bought a net $40.2 million worth of Indian bonds on Nov 30

(Reporting by Nimesh Vora; Editing by Savio D'Souza)

By Nimesh Vora