MUMBAI The rupee rose to its strongest against the dollar in nearly three weeks on Wednesday as optimism over the U.S. "fiscal cliff" deal boosted risk assets globally, but demand for the greenback from oil firms pulled the unit off the day's high.
Analysts say the rupee could gain further given the strong start to the year in domestic stocks anticipating interest rate cuts from the central bank in January.
However, in the longer-term, concerns about the current account deficit, which hit a record high in the July-September quarter and the government's ability to keep its finances under control could determine the rupee's outlook.
"The short-term is bullish for the rupee but longer-term we need to watch out for the current account and fiscal deficit numbers which are presently acting against the rupee," said A. Ajith Kumar, a senior foreign exchange dealer with Federal Bank.
"But inflows may be there to an extent, so we may see gains until February or March, before any depreciation," he added.
The partially convertible rupee closed at 54.35/36 per dollar versus its previous close of 54.68/69.
The rupee rose to as high as 54.2650, its strongest since December 14 during trade but retreated after oil firms, the biggest buyers of dollars in the domestic currency market, started purchasing the greenback.
On technical charts, the rupee is seeing good support in the 54.27-33 area, or the 76.4 percent retracement of 54.04-55.25, or the December 6 to December 21 rally.
The NSE index rose to a two-year high, breaching the key psychological level of 6,000 at one point. Foreign funds pumped in 24.55 billion rupees into the equity market in 2012 and have been net buyers of shares in the first two days of 2013.
In the offshore non-deliverable forwards, the one-month contract was at 54.60 while the three-month was at 55.16.
In the currency futures market, the most-traded near-month dollar/rupee contract on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.52 with a total traded volume of $5.53 billion.
(Additional reporting by Reuters FX analyst Krishna Kumar in SYDNEY; Editing by Sunil Nair)