Oil spike, risk off on Middle East flare up may drag rupee past 86/USD

MUMBAI (Reuters) -The Indian rupee is expected to slip past 86 to the U.S. dollar at the open on Friday, hit by surging oil prices and sliding risk assets after Israel attacked targets in Iran.
The 1-month non-deliverable forward indicated a open in the 86.02 to 86.10 range, versus 85.60 in the previous session. Brent crude soared 11%, U.S. equity futures plunged 1.8% and safe-haven demand boosted the struggling dollar.
"The real concern for the rupee isn't just today's oil spike - it's the risk of a sustained rally if Middle East tensions deepen," a currency trader at a Mumbai-based bank said.
According to the trader, the 86.00 to 86.10 zone is a major support for the rupee, though he warned that defending it "will be challenging".
Israel said it targeted Iran's nuclear facilities, ballistic missile factories and military commanders on Friday, warning that it marked the beginning of a sustained campaign aimed at preventing Tehran from building an atomic weapon. Another report suggested that explosions were heard northeast of Iran's capital Tehran.
The strikes by Israel came amid mounting tensions over U.S. efforts to halt Iran's production of atomic bomb materials.
"Markets will carefully assess the risk of escalation," DBS Research said in a note.
Safe-haven demand lifted the Japanese yen and the Swiss franc and helped the dollar index recover to the 98 handle. The 10-year U.S. yield dropped despite the jump in oil.
Brent crude is potentially headed for its biggest one-day rise in over three years.
Oil is a major component of India's import bill. A $10 barrel increase in crude can widen the current account deficit by up to 0.4% of GDP, economists estimate, and can add up to 35 basis points to headline consumer inflation.
** One-month non-deliverable rupee forward at 86.12; onshore one-month forward premium at 8.75 paise
** Dollar index up at 98.05
** Brent crude futures up 11.3% at $77.2 per barrel
** Ten-year U.S. note yield at 4.33%
** As per NSDL data, foreign investors sold a net $15.4 mln worth of Indian shares on Jun. 11
** NSDL data shows foreign investors sold a net $296 mln worth of Indian bonds on Jun. 11
(Reporting by Nimesh Vora; Editing by Mrigank Dhaniwala)

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