Mumbai: Ushering in the new year on a strong note, the rupee Tuesday gained 31 paise to hit a nearly two-week high of 54.68 against the dollar on fresh selling of the US currency by exporters.
Meanwhile, reaching a last-minute deal to avoid the much-discussed 'fiscal cliff', the US Senate approved a bill to avert automatic tax hikes and huge spending cuts.
Forex dealers said continued capital inflows and lack of any cues from overseas markets as most of the Asian and European markets were closed Tuesday for the New Year's holiday, also boosted the sentiment in rupee's favour.
The local currency commenced the day higher at 54.83 from Monday's close of 54.99 at the Interbank Foreign Exchange (Forex) market.
Later, it bounced back on firm local stocks and fresh dollar selling by exporters to settle at the day's high of 54.68, up 31 paise, or 0.56 percent, from its previous close.
Meanwhile, foreign institutional investors pumped in over USD 120 million (Rs 665.04 crore) into local equities today, as per provisional BSE data.
The BSE benchmark Sensex spurted by 154.10 points to 19,580.81.
The premium for the forward dollar fell back on fresh receipts from exporters.
The benchmark six-month forward dollar premium payable in June declined to 170-1/2-172 paise from Monday's close of 173-1/2-175 paise.
Far-forward contracts maturing in December also dropped to 310-311-1/2 paise from 314-316 paise.
The RBI has fixed the reference rate for the US dollar at 54.8320 and for euro at 72.4803.
The rupee remained weak against the pound sterling to 89.04 from yesterday's close of 88.90 while recovered to 72.28 per euro from 72.51.
It also bounced back against the Japanese yen to 63.07 per 100 yen from previous close of 63.84.
Experts said rupee recorded gains tracking stock market cues even as current account deficit is at all-time high of 5.4 percent of GDP in September quarter.
Economists, however, have warned of higher volatility in forex market.
"Though second quarter CAD number was as per expectations, widening deficit increases the vulnerability of the domestic economy to the capital flows," Chief Economist of the rating agency, Crisil, D K Joshi said, adding that for the current fiscal, "We hope the CAD to be around four percent".
"Exports contraction in recent months despite a falling rupee is a cause of worry. Also, the factors contributing to higher CAD like gold and others, are not showing any change. So, higher deficit figure poses a risk to the economy," Chief Economist of Bank of Baroda, Rupa Rege Nitsure said.