The rupee posted on Monday its biggest gain against the dollar in more than three weeks on the back of greenback sales by a large corporate and custodian banks, even as other Asian currencies fell due to geopolitical tension from North Korea.
Slight gains in the euro also helped the rupee as the impact of Friday's weaker-than-expected U.S. jobs data waned, but traders said the outlook for the common currency was clouded by concerns about economic slowdown in the euro zone and speculation the European Central Bank could ease policy.
The rupee could also remain constrained ahead of industrial output and consumer inflation data due on Friday amid concerns high inflation will prevent the Reserve Bank of India from cutting interest rates aggressively despite weakening growth.
That comes on top of continued concerns about the stability of the ruling coalition and the aftermath of data showing a record current account deficit in the October-December quarter earlier this month.
"The euro's gains to some extent helped the rupee as well but mostly it was the dollar sales by a large corporate and custodian banks," said Pramod Patil, assistant vice president forex and money markets at United Overseas Bank.
"The rupee may appreciate briefly if euro gains, but euro's problems are not over, so that appreciation will not last. I expect 54.30 to 55.00 range this week. Rupee may break past 55 to touch 55.20 levels in the next one month as fundamentally negatives like political uncertainty and a high current account deficit remain," he added.
The partially convertible rupee closed at 54.56/57 per dollar versus its previous close of 54.8050/8150. The rupee gained over 0.4 percent on the day, its biggest single day gain since March 15.
Traders said they would continue to monitor share movement in the near term to gauge foreign fund flows. Foreign funds have sold about $135 million worth of shares in the last four trading sessions to Friday, stock market regulator data showed.
The Nifty edged lower to a near seven-month low as software services exporters fell ahead of what is widely expected to be a lacklustre earnings season.
The euro was up 0.1 percent at $1.3007, hovering near a two-week high of $1.3040 set on Friday after the weaker-than-expected jobs growth data.
In the offshore non-deliverable forwards (PNDF), the one-month contract was at 54.89 while the three-month was at 55.54.
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 54.76 with a total traded volume of $3.5 billion.