The rupee sank 27 paise to close at a one-week low of 68.70 against the US dollar today amid a ratcheting up of global trade war rhetoric.
Sentiment turned fragile after US officials confirmed a proposal to raise tariffs on USD 200 billion worth of Chinese imports from 10 per cent to 25 per cent.
A massive sell-off in local equities also reverberated through the forex market.
The Indian unit stormed to a fresh one-month high of 68.26 in early trade, a day after the RBI struck an optimistic tone on the economy's macro fundamentals and growth outlook.
The home currency see-sawed between a high of 68.26 and a low of 68.72 during the day.
Earlier, the rupee resumed higher at 68.37 against Wednesday's close of 68.43 at the Interbank Foreign Exchange (forex) market.
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It later strengthened to a fresh one-month high of 68.26 on heavy dollar unwinding, well supported by falling crude prices.
However, forex market sentiment took a sudden U-turn in mid-afternoon deals, largely tracking global volatility.
The rupee plummeted to hit a low of 68.72 before finally ending the day at 68.70, showing a steep loss of 27 paise, or 0.39 per cent.
The rupee had strengthened 24 paise against the USD in the last two trading sessions.
A sharp fall in global crude prices and muted reaction from Asian peers to the Fed's decision to keep rates unchanged failed to infuse any positive momentum.
On the energy front, crude prices extended their slide for the third day following a surprise increase in US crude inventories.
The benchmark Brent for September settlement was trading sharply lower at USD 71.95 a barrel in early Asian trade.
Meanwhile, Financial Benchmarks India Private Limited (FBIL) fixed the reference rate for the dollar at 68.3566 and for the euro at 79.5748.
The bond markets also reacted negatively and the 10-year benchmark bond yield gained 2 basis points to 7.72 per cent.
Globally, the US dollar rallied against major rivals and the Chinese yuan dropped to a 14-month low after the flare-up in trade tensions between the US and China sent investors scrambling to buy the greenback.
Against a basket of other currencies, the dollar index rose sharply to 94.73.
In cross-currency trade, the rupee retreated against the pound sterling to end at 89.98 per pound and also fell back against the Japanese yen to 61.63 per 100 yens from 61.19 earlier.
The home unit, however, rose against the euro to close at 79.80 compared to 79.95.
Elsewhere, the pound sterling traded weak against the US dollar as investors refrained from placing aggressive bets ahead of the Bank of England meeting.
Euro was trading lower against the greenback as focus remained on renewed trade war jitters and ahead of Friday's jobs report in the US.
In forward market today, premium for dollar declined due to heavy receiving from exporters.
The benchmark six-month forward premium payable in December moved down to 120.75-122.75 paise from 123-125 paise and the far-forward June 2019 contract also edged lower to 268.50-270.50 paise from 270.50-272.50 paise yesterday.