The rupee commenced stable at its last closing level of 53.96 at the Interbank Foreign Exchange market.
Forex dealers said strength in euro against the US dollar overseas and increased capital inflows supported the rupee.
Snapping a five-day downward march, the BSE benchmark Sensex on Wednesday shot up by 187.97 points to 18,414.45.
The dollar index was up by 0.04 per cent against a basket of six major global rivals.
Foreign institutional investors sold domestic shares worth USD 8.36 million (Rs 45.41 crore), according to provisional BSE data.
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 dollar index recovered its early losses and was trading up by 0.11 per cent against a basket of six major 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.
The rupee had lost 23 paise to end at 54.09 in Tuesday's trade due to month-end dollar demand.
The rupee had gained 5 paise to end at 55.62 against the dollar on selling of the American currency by exporters in Wednesday's session.
Forex dealers said euro's gains against the American currency in the overseas market also supported the rupee.
The rupee resumed lower at 54.37 per dollar as against the last closing level of 54.07 at the Interbank Foreign Exchange Market.
The rupee resumed lower at 54.43 per dollar as against the last weekend's level of 54.22 at the Interbank Foreign Exchange market.
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.
Forex dealers said continued capital inflows and euro's gains against the dollar overseas on hopes that the European Central Bank may take action soon to ease the continent's debt crisis, kept the rupee's sentiment firm.
Forex dealers said slight weakness in dollar overseas capped the rupee's losses to some extent.
Forex dealers said besides dollar's gains against euro in the overseas markets on worsening euro-zone debt crisis amid growing fears that Spain may need a full bailout, a weak opening in the stock market also put pressure on the local unit.
The Bombay Stock Exchange, the National Stock Exchange, the interbank foreign exchange market and overnight call money/government securities market will remain closed on Wednesday.
Tracking the strong uptick in stock markets and early dollar sales by exporters, the rupee improved further to log nearly a two-week high of 54.34.
A higher opening in the domestic equity market and the strengthening of euro and yen against the dollar overseas also aided the rupee, dealers said.
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.
Forex dealers said sustained selling of the American currency by exporters and bullish local equity markets buoyed the rupee sentiment.
Forex dealers said rupee was under pressure throughout the session as dollar gained against rivals on hopes that European Central Bank will cut its main interest rate to a record low in a bid to support the region's economic growth.
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.
The rupee had gained 11 paise to end at one-week high of 54.84 against the US dollar in Wednesday's trade on sustained selling of the US dollar by exporters and capital inflows.
Forex dealers said a weak dollar overseas also boosted the rupee sentiment, cutting short a two-day losing trend.
In New York market, the US dollar pared losses on Wednesday amid reports that cut into optimism that Washington lawmakers are close to a deal to avoid going over the fiscal cliff.
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.
Selling of dollars by exporters helped the Indian currency appreciate.
The local currency, which had plunged to an all-time low of 55.39 on Tuesday, crashed to 55.82 at the Interbank Foreign Exchange market in early trade.
Besides, a higher opening in the domestic equity market and strengthening of euro and yen against the American currency overseas supported the rupee, forex dealers said.
The rupee commenced higher at 55.07 a dollar at the Interbank Foreign Exchange market from last Friday's close of 55.16.
Dollar index was seen trading in a thin range ahead of unemployment claims and Fed Chairman Bernanke speech later on Thursday.
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