MUMBAI, April 8 (Reuters) - The market turmoil unleashed by the U.S. reciprocal tariffs has pushed up the Indian rupee's volatility expectations to a near two-year high as traders grapple with the economic and geopolitical implications of a trade war.

While the rupee was only modestly weaker at 85.90 per U.S. dollar as of 11:00 a.m. IST on Monday, its one-month implied volatility , a gauge of future expectations was hovering around 4.5%, the highest since August 2023.

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This increase resembles the move in the rupee's Asian peers amid the flurry of trade tariff developments.

For instance, the most recent salvos between China and the United States have contributed to pushing the offshore Chinese yuan's 1-month implied volatility to a multi-month peak of 7.1%.

There has been some "panic hedging activity" from both exporters and importers, which has contributed to the heightened two-way movement on the rupee, a trader at a state-run bank said.

A broadly weaker dollar had lifted the rupee to its year-to-date high last week and spurred a pickup in importer hedging.

But the currency reversed course this week after China hit back with a threat of matching the 34% U.S. tariffs, which prompted President Donald Trump to threaten even higher levies.

The rupee's U-turn also prompted some exporters to become active again, the trader added.

"The broader trend of rupee for the next one month could be between 84.50 and 86.50," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.

"Exporters need to hedge near 86.00 levels to protect their costing, while importers may wait for further hedging till 85.25."

Meanwhile, dollar-rupee far forward premiums retreated after touching a near three-month peak on Monday as near-tenor US bond yields rose. The one-year implied yield was down 5 basis points at 2.35%.

https://www.reuters.com/markets/currencies/trade-war-woes-boost-rupee-volatility-expectations-two-year-peak-2025-04-08/