The Indian rupee tumbled 10 paise to close at 71.81 against the US dollar on Wednesday, in lock-step with weak Asian currencies following a flare-up in US-China tensions.
However, fresh foreign fund inflows and a rally in domestic stocks restricted the fall for the local unit, forex traders said.
At the interbank foreign exchange market, the rupee opened weak at 71.80, then went on to hit a low of 71.91 against the greenback during the day.
It, however, clawed back some lost ground to finally finish at 71.81, showing a fall of 10 paise over its previous close.
The dollar strengthened while emerging market currencies wobbled after US President Donald Trump on Tuesday warned that failure to get a trade deal with China will prompt more tariffs.
Beijing has also hit out against a US legislation on human rights in Hong Kong, saying Washington should stop interfering in China's internal affairs.
The dollar index, which gauges the greenback's strength against a basket of six currencies, rose by 0.15 per cent to 97.99.
"India's rupee is coming under selling pressure following weaker Asian currencies and dollar buying by foreign banks. Foreign fund outflows from domestic equity market in last few days and weaker economic data also weighing on Indian rupee," said V K Sharma, Head - PCG & Capital Market Strategy, HDFC Securities.
According to Gaurang Somaiyaa, Forex and Bullion Analyst, Motilal Oswal Financial Services, "rupee consolidated in a narrow range but came under pressure in the latter half of the session after US president threatened to raise tariffs on China if no deal is reached with China."
Market participants also remained a little cautious ahead of the important FOMC meeting minutes, he added.
Foreign institutional investors (FIIs) bought shares worth a net Rs 566.52 crore on Wednesday, provisional exchange data showed.
Meanwhile, market benchmark BSE Sensex rose 182 points to end near its record peak on Wednesday. After scaling a lifetime (intra-day) high of 40,816.38, the 30-share index ended 181.94 points, or 0.45 per cent, higher at 40,651.64.
Similarly, the broader NSE Nifty closed just shy of the 12,000 mark, advancing 59 points, or 0.49 per cent, to end at 11,999.10.
Brent futures, the global oil benchmark, spurted 0.41 per cent to USD 61.16 per barrel.
The 10-year government bond yield was at 6.47 per cent.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.8138 and for rupee/euro at 79.5625. The reference rate for rupee/British pound was fixed at 93.0932 and for rupee/100 Japanese yen at 66.12.
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