The Indian rupee weakened for a fifth session in six on Thursday as persistent dollar demand from oil and gold importers offset the positive risk sentiment seen regionally, while a fall in local shares also weighed.
Strong Australian jobs data and a surprise interest rate cut by South Korea underpinned Asian shares after Wall Street's extended record run, but prices were capped by concerns that a pick-up in inflation in China will limit its policy options.
Indian shares fell, snapping a three-session winning streak and retreating from three-month highs, as investors took profits in recent outperforming blue chips such as Reliance Industries and Sun Pharmaceutical.
The rupee has not benefited much despite strong foreign buying in stocks and debt. Analysts cite continued demand for dollars from companies, particularly from the commodity sectors.
"I think the supplies by foreign institutional investors are getting absorbed by oil and gold demand," said Paresh Nayar, head of fixed income and foreign exchange trading at First Rand Bank.
Nayar cited 54.60 as a near-term resistance for the USD/INR pair.
The partially convertible rupee closed at 54.25/26 per dollar, compared with 54.16/17 on Wednesday. The unit moved in a 54.14 to 54.3150 range during the session.
Standard Chartered Bank said in a note USD/INR is close to being technically oversold with an immediate resistance at its 100-day moving average of 54.29. A breach of this level could lead to a retest of the last high of 54.91.
"We recommend that real money asset managers use upticks ahead of 55-55.20 to position for a more sustained downmove in H2-2013," analysts at the bank said in the note.
In the near term, investors will also focus on economic data as India is set to release consumer price inflation and industrial ouput numbers on Friday, to be followed by wholesale prices data on Monday.
In the offshore non-deliverable forwards, the one-month contract was at 54.45 while the three-month was at 54.94.
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 54.36 with a total traded volume of $4 billion.