The rupee slipped after a higher start on Friday as traders grabbed an arbitrage opportunity in the futures and forward markets, while gold-related demand for dollars also weighed on the Indian unit.
At 10:45 am (0515 GMT), the partially convertible rupee was at 46.68/69 per dollar, 0.2 per cent weaker from 46.58/59 at close on Thursday when it had hit 46.79 during trade, its lowest since June 11.
The rupee had opened at 46.47 and rose as high as 46.44 before falling.
"Gold prices are down, so there is some gold-related dollar buying," said Vikas Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank, adding that arbitrage between the futures and forwards was the main reason for the rupee's fall.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were at 46.8150 and 46.8175 respectively, with the total traded volume on the two exchanges at about $1.7 billion.
The one-month onshore forward contract was trading at 46.88, prompting banks to buy dollars in the futures market and sell in the forwards. However, the gap between the two rates has narrowed from around 0.15 rupee in the morning to 0.06 rupee.
"There was arbitrage opportunity between the MCX and OTC markets in the morning and a decent arbitrage. So that led to selling (dollar) there and buying here," said Madhusudan Somani, head of foreign exchange trading at Yes Bank.
However, dealers said the arbitrage opportunity would soon disappear and lead to some stabilisation in the rupee rates.
India is the world's largest buyer of gold and a drop of more than 1.5 per cent in gold futures on Thursday have spurred demand, traders said.
The index of the dollar against six major currencies was down 0.1 per cent. Most regional currencies rose against the dollar.
The dollar was on the back foot against the euro and slipped against the Aussie on Friday after a big euro short squeeze ahead of US jobs data, while the yen lost ground all round as the squeeze spilled into Asian trade.
Indian shares were up 0.2 per cent, with Reliance Industries leading the rise, taking cues from firm Asian markets.
Foreign fund flows play a crucial role in determining the rupee's fortunes. Foreigners have bought a net $6.7 billion of stocks so far in 2010, in addition to last year's record $17.5 billion inflow.