The Indian rupee weakened on Tuesday after an early rise as traders covered short positions in the dollar, tracking a reversal in stock market gains and in line with a broadly strong U.S. unit overseas.
At 10:30 a.m. (0500 GMT), the partially convertible rupee was at 44.80/81 per dollar, after moving in a band of 44.60-44.82, and 0.2 percent below Monday's close of 44.70/71.
"(There is) some bit of short-covering in the dollar which has caused the bounce back from 44.60-65 levels. Not much import demand seen so far; 44.65 if broken can lead to 44.50, while on the topside, there will be resistance at 44.80," said Ashtosh Raina, head of forex trading at HDFC Bank .
The dollar edged broadly higher on Tuesday, with the yen on the backfoot after upbeat data suggested the world's biggest economy will accelerate in 2011.
The index of the dollar against six major currencies was up 0.2 percent at 79.255 points. Most Asian currencies, however, were stronger versus the dollar and could underpin rupee sentiment.
Traders said they expect dollar demand from oil firms and other importers around 44.60, which would limit a sharp upside in the rupee but they are bullish on the rupee's near-term prospects on hopes of sustained foreign fund inflows.
They also expect exporters to come in and sell dollars around 44.80-44.85 levels, limiting a sharp downside for the rupee.
Foreign institutional investors bought about $896 million worth of shares in the six trading sessions until Friday, taking total investments in 2010 to a record $29.3 billion, compared with the $17.5 billion net inflow in 2009.
The rupee rose 4.1 percent in 2010, compared with a 4.7 percent rise in 2009.
Indian shares turned negative on Tuesday morning, with financials leading the decline, as investors booked profits after four sessions of rise.
One-month offshore non-deliverable forward contracts were quoted at 45.01, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at 44.9950, with the total traded volume on the two exchanges at $1.1 billion.