INDIA RUPEE-Indian rupee posts worst week in nine on dollar surge, hawkish Fed

By Sethuraman N R

MUMBAI, May 19 (Reuters) - The Indian rupee closed down on Friday, recording its worst week in nine, pulled down by a strong dollar on the back of a hawkish U.S. Federal Reserve and hopes of a breakthrough in U.S. debt ceiling talks.

The rupee ended 82.66 to the U.S. dollar, compared to its close of 82.60 in the previous session. The local currency hit its lowest level since March 16 at 82.8010 earlier in the session.

For the week, the rupee ended down 0.6%.

Hopes for a deal over the U.S. debt ceiling lifted the dollar index to over 8-week highs this week, and the index has gained nearly 2% in the past two weeks.

"The rupee's performance is absolutely in line with what other currencies are going through," said Anindya Banerjee, head of research - FX and interest rates at Kotak Securities, attributing the fall to the dollar's strength.

"The U.S. economic data has not been as bad as expected and there has been repricing of Fed's move," Banerjee said.

Affirming the Fed's hawkish views, two policymakers said on Thursday that U.S. inflation does not look like it is cooling fast enough to allow the central bank to pause its interest-rate-hike cycle.

Meanwhile, the number of Americans filing new jobless claims dropped more than expected last week, suggesting a resilient labour market.

"It's hard to buck the dollar's bullish momentum now, as we also think some substantial squeezing of short USD positions can be behind the move," ING analysts said in a note.

The U.S. debt-ceiling deal may be announced, but that appears to be mostly priced in by now, ING said. (Reporting by Nallur Sethuraman in Mumbai; Editing by Varun H K)