The rupee rallied to two-month high of 54.79 a dollar on Friday on fresh selling of the American currency by banks and importers amid strong equity markets and sustained capital inflows.

The dollar has also weakened against other currencies in the overseas forex markets.

The dollar fell in New York market yesterday after the Federal Reserve announced a new bond-purchase programme to bolster the US economy. The central bank's steps sent US stocks much higher, reducing demand for the American currency.

Back home, the rupee resumed lower at 55.85 a dollar as against yesterday's closing level of 55.43 at the Interbank Foreign Exchange (Forex) market. However, it recovered soon to a high of 54.63 a dollar, before quoting 54.79 at 1040 hrs.

Capital inflows from foreign funds in equity markets also boosted the rupee, said a forex dealer.

The BSE 30-stock index, Sensex, was up 389 points or 2.16% at 18,408.25 (1100 hrs), in line with strong global markets and the government's move to hike diesel prices by Rs. 5 a litre to cut subsidies and reduce fiscal deficit.