Forex dealers said strength in euro against the US dollar overseas and increased capital inflows supported the rupee.
The dollar was firm against some global currencies.
The dollar index was up by 0.04 per cent against a basket of six major global rivals.
Forex dealers said continued capital inflows and a weak dollar overseas also supported the local currency.
The dollar index was down by 0.03 per cent against a basket of six major rivals as Euro rose against the dollar after the Cyprus reached bailout agreement.
The dollar index was down by 0.16 per cent against its six major global rivals.
The rupee fell back sharply against the pound sterling at 83.28 from Monday's close of 82.49 and also reacted downwards against the euro to 71.59 from 71.29.
Dealers said the country's trade balance numbers were inline with expectations as India's exports rose an annual 0.8 per cent in January and imports for the month rose 6 per cent, leaving a trade deficit of $20 billion.
The rupee hovered in a range of 53.85-54.24 per US dollar during the day.
Forex dealers said slight weakness in dollar overseas capped the rupee's losses to some extent.
Forex dealers said bouts of heavy dollar demand from banks and oil importers amid lower equities attributed the rupee sentiment.
Forex dealers said besides dollar's gains against euro and yen overseas, increased demand from oil importers for the American currency and a weak opening in the stock market also put pressure on the rupee.
Fresh bouts of dollar demand from banks and importers mainly attributed to rupee sentiment, though sustained foreign capital inflows restricting its further fall, a dealer said.
The rupee had gained 17 paise to close at one-week high of 54.77 against the dollar on fresh selling of the US currency by exporters and capital inflows in the previous session on Friday.
Forex dealers said a weak dollar overseas also boosted the rupee sentiment, cutting short a two-day losing trend.
A weak dollar overseas ahead of a US Fed policy meeting also aided the rupee recovery while late weakness in domestic equities restricted the rupee's rise, forex dealers said.
Forex dealers said a weak dollar overseas and firm local equities also supported the local currency.
Forex dealers said some capital inflows and a weak dollar overseas helped the local currency make an attempt to arrest its fall.
Forex dealers said, however, a firm dollar capped rupee's rise to some extent.
Sustained foreign capital inflows coupled with recovery in the equity market mainly boosted the rupee value against the dollar, a forex dealer said.
The dollar index was down by 0.23 per cent against a basket of six major rivals after the US Federal Reserve continued to express concern about the economy and made no changes to its ultra-easy monetary policies.
The Indian stock market benchmark Sensex, which was down till afternoon session, recovered later and closed up by 38.37 points or 0.21 per cent after Europe opened higher.
A weakening dollar against other currencies overseas supported the rupee.
The rupee had gained 11 paise to close at a fresh over 18-week high of 53.36 against the dollar in the previous session.
The rupee lost 2 paise to end at 53.47 against the dollar in Monday's session on heavy month-end dollar demand from importers and weakness in equities.
The rupee resumed higher at 54.15 per dollar as against last closing level of 54.38 at the Interbank Foreign Exchange Market and firmed up further to 54.00 at 1040 hours.
With dollar demand rising, it dropped further to 55.49, before ending slightly better at 55.43 -- a loss of 22 paise or 0.39 per cent over Wednesday.
The rupee had strengthened by 30 paise to close at two-week high of 55.36 against the dollar in Friday's trade on the back of capital inflows.
Besides, steady euro against the American unit and a higher opening in the domestic equity market supported the rupee, forex dealers said.
Foreign institutional investors pumped around Rs 100 crore (Rs 1 billion) in stocks on Tuesday.
The finance ministry on Monday said the ability of the Reserve Bank to intervene in the forex market to arrest the fall in rupee is limited, even as the Indian currency declined to a 32-month low of Rs 51.50 per US dollar in the early trade.
Dealers said apart from gains in euro and the Asian currencies against the American currency overseas, higher opening in the domestic equity market and selling of dollars by exporters and some banks supported the rupee.
In New York, the dollar index climbed to its highest level in about two years on Wednesday.
Weak trends in local stocks with Sensex dropping by 129 points also weighed on rupee but some capital inflows limited its decline to some extent, forex dealers said.
The rupee resumed higher at the Interbank Foreign Exchange market but fell to a intra-day low of 57.10.
The currency hit a record low of 57.32 on June 22 and has so far shed 7 per cent value against the dollar in 2012, making it worst performing currency in Asia.
On Tuesday, the rupee had closed three paise down at 55.96 against the dollar amid foreign fund outflows and demand of the US currency from importers.
Strengthening of the euro against the US dollar overseas also supported the rupee.
The rupee commenced higher at 55.14 a dollar from the overnight close of 55.36 at the Interbank Foreign Exchange market, and immediately touched a low of 55.30 on some dollar demand from oil importers as crude oil hovered around the $85 per barrel.
The rupee had lost 11 paise to close at 55.65 against the Greenback on Monday due to late dollar demand from importers.
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