which increases money supply on account of the US government buying assets, tends to put pressure on the currency.
As a result, exporters and some banks in India sold dollars on hopes of further dollar fall overseas, helping the rupee recover, traders said.
At the Interbank Foreign Exchange (Forex) market, the rupee opened sharply higher at 54.89 a dollar from its previous close of 55.31.
It immediately touched a high of 54.80 on early rise in local equities amid heavy dollar selling by exporters. Foreign Institutional Investors (FIIs) continued their buying with stocks worth Rs. 475 crore on Tuesday.
However, the sentiment in favour of rupee was hit in line with stocks that weakened and the currency touched a low of 55.22. It finally concluded at 55.11, a rise of 20 paise of 0.36% over Monday.
"Dealers are looking ahead for the Fed Chairman Bernanke testimony to the US Congress...We expect the rupee may witness a gap up opening tomorrow in absence of fresh QE from Fed," said Alpari Financial Services (India) CEO Pramit Brahmbhatt.
Reflecting the optimism, the dollar index -- an indicator of a basket of six major currencies -- was down by nearly 0.1%. The dollar weakened for a third day against euro.
However, some experts feel the chances of further quantitiave easing by Fed are bleak even though a spate of economic data strengthens its case now.
Meanhwile, the Indian stock market benchmark Sensex, which was up by over 130 points in the morning, fell back and closed nearly flat.
The rupee is seen trading range-bound in the last few days as worries mount over deficient monsoon locally while global economy is showing signs of slowdown, said forex traders.
"The markets are hoping for any hints of potential US Monetary easing steps from Federal Reserve to stimulate the growth after poor retail sales data. But as per our hopes the QE3 is still not on the table as of now. The rupee is expected to be in the range of 54.50-56.00 for next 7-10 days," said Abhishek Goenka, CEO, India Forex Advisors.
The premium for the forward dollar ended steady to better on paying pressure from banks and corporates.
The benchmark six-month forward dollar premium payable in December settled at its overnight level of 158-160 paise.
However, the premium for far-forward contracts maturing in June moved up to 298-300 paise from 295-297 paise.
The RBI fixed the reference rate for the US dollar at 55.1455 and for euro at 67.7260.
The rupee declined further against the pound sterling to end at 86.14 from previous close of 85.95 and also slipped to 67.67 per euro from 67.42.
However, the rupee recouped against the Japanese yen to 69.71 per 100 yen from last close of 70.01.