The rupee retreated from early high levels to close down with a modest loss of 2 paise at 68.86 against the US currency on stray dollar demand from importers.
The home currency initially reacted positively to the GST Council's decision to cut rates on several items and also tracking broad weakness in the dollar.
It touched a high of 68.65 in early trade before slipping back toward the tail-end trade.
Consistent unwinding by foreign investors on growing expectations of Fed rate hike kept home currency under pressure, a dealer said.
Overall, forex sentiment remained fragile in the face macro challenges coupled with tense trade relations between the US and major economies and expectations that the Federal Reserve will raise interest rates further this year.
The Indian rupee had hit its life-time low of 69.13 a dollar last Friday.
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Oil prices too inched up today after tensions worsened between Iran and the US. The Brent crude rising 66 cents to USD 73.73 per barrel and West Texas Intermediate gaining 27 cents to USD 68.53 per barrel.
Foreign investors remained net investors in stock markets as they bought equities worth Rs 259 crore on net basis today.
Domestic bourses maintained their bullish momentum for the second-straight session with the flagship BSE Sensex ending at a historic closing high driven by optimistic corporate earnings as well as strong buying from investors.
The rupee resumed higher at 68.70 against weekend close of 68.84 at the Interbank Foreign Exchange (forex) market on increased selling of the American currency by exporters and banks.
It extended gains to hit a session high of 68.65, but the upside attempts fizzled out quickly following fresh dollar demand. The local currency dropped to a low of 68.87 before settling at 68.86, showing a loss of 2 paise.
The Financial Benchmarks India private limited (FBIL), meanwhile, fixed the reference rate for the dollar at 68.7040 and for the euro at 80.5619.
The bond market also witnessed fresh selling and the 10-year benchmark yield end at higher at 7.81 per cent.
In the cross currency trade, the rupee continued to lose ground against the pound sterling to finish at 90.50 per pound from 89.80 and dropped against the euro to end at 80.68 as compared to 80.25. It also slumped further against the Japanse yen to close at 62.00 per 100 yens from 61.26 earlier.
In forward market today, the premium for dollar displayed lacklustre trading activity owing to lack of market moving factors.
The benchmark six-month forward premium payable in November softened to 103-105 paise from 103.25-105.25 paise, while the far-forward May 2019 contract inched up to 252-50-254.50 paise from 252-254 paise.