The rupee washed out its early gains and closed 37 paise down to settle at 55.48, its weakest level this week, on fresh dollar demand from importers and banks as Fed chief Ben Bernanke stopped short of signalling more quantitative measures for the ailing economy.
Bernanke's comments in front of the US Congress on Tuesday helped the American currency shrug off negative sentiments as more money supply is expected to pressure the dollar.
Forex dealers also said reports of German Chancellor Angela Merkel indicating that Eurozone's problems are not over weighed on the euro leading to more demand for dollar.
At the Interbank Foreign Exchange (Forex) market, the rupee opened higher at 55.00 a dollar from previous close of 55.11. Soon after, it touched the day's high of 54.97.
However, rising demand for dollar, especially oil importers with Brent crude slipping to USD 103 levels, pushed the rupee sharply to a low of 55.55 before concluding the day at 55.48, a fall of 0.67 per cent. This was worst closing since rupee ended at 55.94 on July 12 last week.
Traders said a rise in local shares with Sensex closing 80 points up amid FII inflows worth Rs 276 crore kept the rupee fall under check to some extent.
"Weakness in the rupee was mostly on account of dollar buying in the market. Even the Euro is seen weakening against the US dollar and it is trading below USD 1.2250 levels," said Abhishek Goenka, Founder & CEO, India [ Images ] Forex Advisors.
The dollar index was up by 0.35 per cent against a basket of six major global currencies, recovering from overnight losses after the Fed did not commit to more monetary measures.
"The rupee dropped even though stock market ended higher... Bernanke's testimony for the second day can be a non-event as most of his speech has already been delivered," said Pramit Brahmbhatt, CEO, Alpari Financial Services India.
The euro fell to intra-day low against the dollar, a record low against the Australian dollar and an over 11-year low versus the Swedish crown.