The rupee rose on Friday as shares rebounded strongly following fresh efforts by euro zone policymakers to prevent precipitation of Europe's debt problems into a financial crisis.
Traders said the gains, coming after a local holiday when global markets had climbed, reflected efforts to catch up and were difficult to sustain.
At 10:26 am (0456 GMT), the partially convertible rupee was at 49.06/07 per dollar, 0.6% stronger than the previous close of 49.34/35. It had briefly touched a one-week high of 49 in early trade.
"The rise is being fuelled only by stocks and looks temporary. Even the euro has not risen as much as it should have after the new steps were announced from Europe," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The main share index surged more than 3%, rebounding from a four-day slide and the euro was at USD 1.3431 after moving in a band of USD 1.3404-USD 1.3440.
The single currency had been at USD 1.3326 at the end of rupee trade on Wednesday, while the index of the dollar against six major currencies was at 78.569 points from 79.057.
The Bank of England launched a second round of quantitative easing to defend Britain's faltering economy on Thursday and the European Central Bank threw another lifeline to commercial banks by renewing offers to lend them one-year funding in two operations, this month and in December.
The rupee had slumped 8.8% in the three months to September, its biggest quarterly fall in nearly three
years and the near-term outlook has been weighed down by a slowing economy and widening current account deficit.
"This could be a bear market rally. Nothing has really changed in the global economy," said a foreign exchange dealer at a foreign bank.
Data released on Wednesday showed the euro zone's services sector shrank for the first time in two years in September as new orders dried up, stoking fears that the region's economy could be heading back into recession.
The one-month onshore forward premium was at 19.75 points from 18.5 on Wednesday while the one-month offshore non-deliverable forward contracts were quoted at 49.28.
In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all at 49.2025. The total traded volume on the three exchanges was USD 850 million.
