The Indian rupee strengthened for a second day on Thursday, hitting a near one-week high, as dollar selling by foreign banks and a late recovery in the domestic share market boosted sentiment.
Traders will, however, focus now on the global risk sentiment with major central banks due to announce monetary policy decisions later in the day.
European shares edged higher and the euro hovered near three-month lows against the dollar on Thursday on expectations the European Central Bank could point to future policy easing after its rate-setting meeting later.
The Bank of Japan kept policy on hold earlier in the day.
"Foreign banks were mainly on the sell-side today. There were good flows heard in the market. Even the euro has bounced back from 1.30 levels, so that too is helping the rupee," said Ashis Barua, a senior foreign exchange dealer at IndusInd Bank.
"I expect 54.30-40 levels to hold for now while 55.15 may hold on the topside. If 55.15 is broken consistently, I expect 56 levels to be targeted in about 15-20 days," he added.
The partially convertible rupee closed at 54.56/57 per dollar compared with its previous close of 54.7150/7250. The rupee rose as high as 54.5050, its strongest since March 1.
Traders said dollar inflows were seen for Power Grid's bond issue. Power Grid Corporation of India plans to raise up to 20 billion rupees ($364.66 million) through a bond sale, three sources said earlier in the day.
Indian shares rose to their highest level in nearly 2-1/2 weeks as technology shares such as Tata Consultancy Services gained on expectations of improving sector earnings this year, especially in the United States.
An inverse head and shoulders pattern in USD/INR could trigger a sharp move up if the pair breaks and stays above the neckline of 55.40 for about two weeks, India Forex Advisors said in a note.
In the offshore non-deliverable forwards, the one-month contract was at 54.95 while the three-month was at 55.57.
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 54.80 with a total traded volume of $5.20 billion.