The rupee continued its downward spiral on Tuesday tracking the weakness of euro and other Asian currencies against the US dollar. It touched a new two-year low after rating agency S&P downgraded Italy, further fuelling fears about Euro zone's sovereign debt crisis.

The rupee opened lower at 48.15 to a dollar and soon touched 48.25, a level last seen in September 2009. It later recovered to 47.90 and closed at 48.05. On Monday, the rupee had closed at 47.81.

On Tuesday, the euro fell in early Asian trade after S&P cut Italy's rating. During the day, it traded in a range of $1.359 and $1.372 against the dollar.

“The euro moved sharply. This pressure on the euro is likely to continue for some time. In such a situation, it is better to go long on the rupee-dollar and buy dollars,'' said a forex dealer with a private bank.

The weakening rupee could put pressure on India's fiscal deficit as the country depends heavily on imports for its fuel. This could prompt the central bank to intervene in the spot market if rupee falls further.

“The RBI had defended the rupee when it had touched 48 levels. Today, the central bank seemed to have kept away. But we may see the central bank intervening again if the rupee falls further,” said a forex dealer.

According to Mr Manish Sarraf, head of treasury, Dhanlaxmi Bank, as long as the crisis in the Euro zone outweighs the problems in the US, the euro will decline and the pressure on the dollar-rupee will continue.

The bank is advising its importer-clients to buy dollars with a three to six month time horizon because it will take that long to see a correction, he said.

“Over a two/three-year period, assuming that growth for India will continue at this pace, the rupee will appreciate provided inflation is brought under control. Until then the pressure on the dollar-rupee could continue,'' Mr Sarraf said.

In the forward premia market, the one-year forward closed at 2.45 per cent (2.22 per cent).

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