The local currency commenced better at 55.35 a dollar from last close of 55.41 on the Interbank Foreign Exchange market and improved further to a high of 55.33.
Wilting under heavy dollar demand, it fell back steeply to 55.64 before closing at 55.46, a fall of five paise, or 0.09 per cent. This is rupee's lowest closing since 55.45 on November 27, 2012.
"A mix of strong US dollar overseas, high import demand, which is seasonal and participant positioning, which was overly short on US Dollar might have been the reason for sharp upside move in the US Dollar against the rupee," said Anindya Banerjee, currency analyst at Kotak Securities.
The dollar index was up by 0.13 per cent against a basket of six major global rivals.
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Meanwhile, the BSE benchmark Sensex today declined by over 49 points to close at a one-week low of 20,062.24.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Dollar demand from gold and oil importers weakened the rupee. Also the equity markets closed lower which further depreciated the rupee. Now the major resistance level for spot USD/INR pair is set on 55.75, which if breached then 56.20 will be the next level to watch."
Banerjee of Kotak Securities said: "Going forward, market would keep a close eye on the US Fed Chairman's testimony to Senate and also US FOMC minutes, both will be scanned for clues about the direction of QE.