The Indian rupee weakened for a second session on Friday on the back of dollar demand from oil and defence firms as well as other companies while the global risk-off mood also prompted short-covering of dollar positions.
Broad optimism seen over the U.S. "fiscal cliff" deal at the start of 2013 began to fade after Federal Reserve officials raised concerns about possible side effects of the stimulus progamme, dragging global shares lower.
The tepid weekly performance in the rupee comes after data on Monday showed the current account deficit widened to a record high in the July-September quarter, reviving worries about India's twin deficits and potentially constraining the rupee's gains.
"I expect the rupee to depreciate further from here. We may see 55.40-45 levels next week. We have to watch the flows into the stock market after new year hoildays. Until then rupee can trade lower," said Hari Chandramgethen, head of forex trading at South Indian Bank, predicting a range of 54.70-55.50 next week.
The partially convertible rupee closed at 55.07/08 per dollar, 1.05 percent weaker compared to its close of 54.49/50 on Thursday. The unit closed down 0.15 percent on the week.
Traders said sharp gains in the dollar versus major currencies triggered some short-covering while there was also a corporate outflow of $50 million, which added to the selling pressure on the rupee.
The dollar index against six major currencies was trading up 0.56 percent when the local market closed.
The weaker rupee this week comes despite a solid performance in domestic shares, with indexes posting their biggest weekly gains since the week ended on Nov. 30, while bonds rallied on expectations of interest rate cuts this month.
In the offshore non-deliverable forwards, the one-month contract was at 55.39 while the 3-month was at 55.96.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.33 with a total traded volume of $5.3 billion.