COLOMBO, Dec 20 (Reuters) - The Sri Lankan rupee closed weaker on Tuesday on dollar buying by banks and importers, with dealers saying the rupee was expected to fall further unless the country's central bank stepped in to raise interest rates.
The dollar bounced back towards 14-year highs on Tuesday, boosted by upbeat comments by U.S. Federal Reserve Chair Janet Yellen that kept alive market expectations for a faster pace of U.S. interest rate hikes next year than had previously been forecast.
At home, rupee forwards were active with spot-next forwards closing at 149.85/95 per dollar, compared with Monday's close of 149.60/80.
"There is some element of uncertainty after a stock deal was reversed. Some banks are collecting dollars. Sentiment has to be built up for inflows," a currency dealer said, asking not to be named.
On Monday, Sri Lankan Prime Minister Ranil Wickremesinghe ordered a reversal and a probe into a 1.3 billion rupees ($8.7 million) stake sale deal in Seylan Bank, and dealers said that dented market sentiment.
The spot-next was quoted at 149.90/150.10 before a bank offered dollars at 149.90 to ease pressure on the rupee, dealers said.
The central bank will have to let the currency depreciate or raise key policy rates at a monetary board meeting later this month, they said.
Finance Minister Ravi Karunanayake told Reuters in an interview on Tuesday that the currency would recover and be steady next year with expected foreign inflows.
The spot currency was hardly traded on Tuesday.
The central bank increased the spot reference rate by 30 cents to 149.10 after the U.S. Federal Reserve raised interest rates by 25 basis points last Wednesday. It raised the reference rate by a total 40 cents last week.
The rupee usually rises in December ahead of Christmas and New Year due to remittances from expatriates, but dealers said the currency was expected to face pressure this time due to higher dollar demand from importers following the Fed rate hike.
Analysts say they expect some capital outflow as an immediate reaction to the Fed rate hike, and have expressed concern that the government's foreign borrowing cost would rise in the short term.
Foreign investors have net sold 52.3 billion rupees ($350.77 million) of government securities in the eight weeks ended Dec. 14. (Reporting by Shihar Aneez; Editing by Biju Dwarakanath)