December 21, 2016 / 8:55 AM / 7 months ago

Sri Lankan rupee down on importer dollar demand, capital outflows

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COLOMBO, Dec 21 (Reuters) - The Sri Lankan rupee fell on Wednesday due to importer demand for the dollar and capital outflows from government securities as the greenback held near 14-year peaks against a basket of major currencies.

The dollar has been strengthening as global yield spreads shifted in its favour, with the U.S. Federal Reserve set to tighten monetary policy.

At home, rupee forwards were active, with one-week forwards trading at 150.50/80 per dollar, compared with Tuesday's close of 150.25/50.

"There is not only importer dollar demand, but also some foreign outflows. We do not see exporter conversions as we saw early this month, and remittances are not up to expectations," a currency dealer said on condition of anonymity.

The spot-next forwards and spot rupee were hardly traded, dealers said.

"I think the authorities would hold the rupee around the 150 level until the end of the year. But the central bank will not be able to hold it for long because it is buying dollars to build up reserves in line with commitment to the IMF," another currency dealer said.

Other 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.

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 central bank increased the spot reference rate by 30 cents to 149.10 after the Fed raised interest rates by 25 basis points last week. 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 said they expect some capital outflows 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.

Sri Lankan shares were down 0.15 percent at 6,225.53 as of 0838 GMT, after touching their lowest since April 7 during the trade.

Turnover stood at 417.2 million rupees ($2.80 million).

$1 = 149.0500 Sri Lankan rupees Reporting by Shihar Aneez; Editing by Amrutha Gayathri

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