Mumbai, Jul 24 (PTI) The rupee pared its initial gains and settled for the day 1 paisa higher at 86.40 (provisional) against the US dollar on Thursday, as risk aversion in global markets and an overnight recovery in crude oil prices dented investors' sentiments.

Forex traders said uncertainty over the India-US trade deal has been an overhang for the forex market, leaving the rupee trading in a tight range. Moreover, a negative trend in domestic equities and foreign fund outflows weighed on investors' sentiments and restricted the upmove of the local unit.

At the interbank foreign exchange, the domestic unit opened at 86.33 against the greenback and touched an intra-day high of 86.24 and a low of 86.42.

At the end of Thursday's trading session, the local unit settled at 86.40 (provisional), higher by 1 paisa over its previous closing price.

On Wednesday, the rupee settled with a loss of 3 paise at 86.41 against the dollar.

"We expect the rupee to trade with a slight negative bias amid geopolitical tensions between Thailand and Cambodia and positive crude oil prices. FII outflows may also weigh on the rupee," Anuj Choudhary – Research Analyst at Mirae Asset Sharekhan said.

"Optimism over US-EU trade deal and weak US Dollar may support the rupee at lower levels. Traders may take cues from new home sales data from the US and remain cautious ahead of PMI and durable goods orders data from the US this week. Investors may also take cues from ECB’s monetary policy decision. USDINR spot price is expected to trade in a range of 86.10 to 86.75," Choudhary said.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.16 per cent to 97.36, as investors watched out for an India-US trade deal ahead of the August 1 deadline.

If the discussions fail or get delayed, Indian exporters could face fresh pressure -- adding to the rupee's challenges.

However, if a deal is reached, it could offer a much-needed breather. Until then, the uncertainty is likely to keep market participants cautious.

Brent crude, the global oil benchmark, went up by 1.18 per cent to USD 69.32 per barrel in futures trade.

The US team will visit India in August for the next round of negotiations for the proposed bilateral trade agreement between the two countries.

India and the US teams concluded the fifth round of talks for the agreement last week in Washington.

Meanwhile, in the domestic equity market, Sensex fell 542.47 points, or 0.66 per cent, to settle at 82,184.17, while Nifty declined 157.80 points, or 0.63 per cent, to close at 25,062.10.

Foreign institutional investors (FIIs) offloaded equities worth Rs 4,209.11 crore on a net basis on Wednesday, according to exchange data. PTI DRR ANU ANU

Currency volatility driven by trade-deal uncertainty and capital outflows may constrain the rupee's near-term direction. The rupee settled marginally higher after trading in a tight range, with short-term exchange-rate dynamics driven by global risk aversion, higher crude oil prices, weak domestic equities and net FII outflows. Uncertainty over the proposed India-US trade agreement, upcoming bilateral negotiations, and near-term US economic data and central bank actions were identified as key factors likely to influence currency direction and volatility.