MUMBAI, June 25 (Reuters) - The Indian rupee is expected to open higher on Wednesday, sustaining its rally past the 86 level, supported by a fall in demand for the safe-haven dollar and upbeat risk appetite following the Israel-Iran ceasefire.

The 1-month non-deliverable forward indicated an open in the 85.92-85.96 range, versus 85.9750 in the previous session. The rupee rallied 0.9% on Tuesday, logging its best single-day performance in a month.

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Brent crude declined 13.2% over the last two days following the ceasefire, and the dollar index had declined by 0.9%.

Investors pared long dollar positions, unwinding bets built up during the 12-day conflict between the two countries.

"The market is unwinding risk-off trades now that it looks like the conflict won’t escalate further," said a currency trader at a Mumbai-based bank.

"We’re seeing better offers (on USD/INR) and light exporter selling. Speculators have been taking to (USD/INR) shorts."

With the Middle East risk premium deflating, attention has shifted back to the weakening U.S. exceptionalism narrative — a key driver behind the dollar index’s nearly 10% slide so far this year.

Analysts say the dollar’s trajectory from here will hinge on how U.S. tariff negotiations unfold and whether Washington can strike trade deals with key partners. Another major driver will be how the U.S. economy holds up amid policy uncertainty and the timing and scale of U.S. Federal Reserve rate cuts.

Fed Chair Jerome Powell stuck to his cautious approach and reiterated that the central bank was in no rush to cut rates at his semi-annual testimony to Congress on Tuesday.

Markets continue to price a low probability of rate cut next month.

"Overall, Chair Powell continued to stress the high level of uncertainty and need for additional data.. the testimony did little to change the overall policy trajectory," Morgan Stanley said in a note.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 86.04; onshore one-month forward premium at 10.25 paise

** Dollar index down at 97.88 ** Brent crude futures at $67.9 per barrel ** Ten-year U.S. note yield at 4.3%

** As per NSDL data, foreign investors sold a net $211.5mln worth of Indian shares on Jun. 23

** NSDL data shows foreign investors sold a net $5.5mln worth of Indian bonds on June 23

https://www.reuters.com/world/india/rupee-hold-above-86-safe-haven-premium-dollar-erodes-2025-06-25/