The rupee closed marginally stronger on Monday as dollar demand from oil firms and some profit-booking in the euro was offset by gains in the domestic sharemarket.
The partially convertible rupee closed at 46.125/135 per dollar, off the day's high of 46.02 and slightly stronger than its 46.15/16 close on Friday, when it had touched 45.97, its strongest since June 22.
The rupee traded in a range of 46.02 to 46.1550 on Monday.
"The rupee opened gap down on the basis of the broad US$ selling after Friday's jobs data in the US but some importers were buying into the dips to cover their US$ exposure," said Nitesh Kumar, an inter-bank dealer with Development Credit Bank.
"The strategy is to sell dollars close to 46.20 with a stop-loss at 46.30 and target the 46 figure," he added.
The dollar was on the defensive against major currencies on Monday, as disappointing US jobs data on Friday highlighted a weakening U.S. economic outlook and added to speculation about further monetary easing.
However, the dollar index against six majors edged up 0.1 per cent in late India trade, as investors booked profits in the euro, which weighed on the rupee.
Traders said gains in local shares boosted the rupee as they raised hopes for larger capital inflows into the country.
So far in 2010, foreigners have bought a net $11 billion worth of shares, in addition to last year's record $17.5 billion inflows.
The BSE Sensex rose 0.8 per cent to test a fresh 2.5 year high, with financials leading the charge, supported by firm world equities.
Dealers said they would watch the Federal Reserve's statement due on Tuesday for fresh cues.
The FED is widely expected to renew its vow to keep rates near zero for "an extended period" and markets will watch closely for signs officials are growing more concerned the recovery is at risk or that there is danger of falling into a damaging vicious cycle of falling prices and slowing growth.
"The statement from the FED will be watched. Ben Bernanke may be dovish after seeing that data is not improving, which will see a dollar sell-off," Development Credit Bank's Kumar said.
"The only thing which is going to stop this rally is negative news and data out of China or Europe."
One-month offshore non-deliverable forward contracts were at 46.30, weaker than the onshore spot rate.
"USDINR weekly charts as per Fibonacci and SMA 200 days show next level of support at 45.60. Weekly stochastic are pointing downwards," economists at Yes Bank said in a note.
"Range expected for fortnight is 45.60 to 46.33 with first level of support at 45.95 and strong resistance at 46.10-12 area."
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 46.2525 and 46.25 respectively, with the total traded volume on the two exchanges at a low $3 billion.
