Rupee drops as dollar rallies; key U.S. jobs data awaited

By Anushka Trivedi

MUMBAI (Reuters) - The Indian rupee weakened on Friday, amid a slide in domestic equities, as the dollar index jumped after strong U.S. data overnight fanned expectations of further monetary tightening from the Federal Reserve.

The rupee ended the session at 82.72 per dollar, compared with its previous close of 82.5550, and gave up most of Thursday's gains of 0.31%. For the week, the currency ended largely unchanged.

"The dollar is gaining ... and we're seeing the rupee react to a selloff in equities," said Gaurang Somaiya, FX and bullion analyst at Motilal Oswal Financial Services.

As long as the broader range of 82.20-83.20 is not taken out, we may not see a clear trend emerge. The trajectory remains to "buy on dips" in the USD/INR as a move to the higher side may continue, Somaiya added.

The pressure on the rupee was likely to sustain through the year due to a high current account deficit and the currency may underperform its major Asian emerging market peers, a senior executive at BNP Paribas told Reuters.

On Friday, Indian equities fell for a third straight day, with some nervousness about the upcoming earnings season creeping in. [.BO]

Meanwhile, the dollar index held near a one-month high after jumping 1% overnight following U.S. data that highlighted a still-tight labour market.

The index is on track for its biggest weekly gain since September.

The closely watched non-farm payrolls report is due later in the day. A better-than-expected reading will make it more likely that the Fed does not downshift to a 25 basis points (bps) rate hike and instead raises rates by 50 bps on Feb. 1, according to analysts.

(Reporting by Anushka Trivedi; Editing by Savio D'Souza)