The rupee cut most of its early losses and closed marginally down by 5 paise on account of China's proposal to buy extra US goods to alleviate trade tensions between the two countries. This reinforced hopes of a partial US-China trade deal.
Forex traders said that majority of the Asian currencies benefited against US dollar on China's offer to purchase additional US goods.
The rupee opened on a strong note at 71.20 against the US dollar at the interbank foreign exchange market. However, the local unit ranged between a high of 70.94 and a low of 71.22 during the day, finally settling at 71.07, down 5 paise over its previous day's close.
On Monday, the domestic unit had settled at 71.02. Forex market was closed on Tuesday on account of the Dussehra festival.
"The local unit opened lower but gradually recovered from the day's low on the expectation of partial deal between US and China trade," V K Sharma, Head PCG & Capital Markets Strategy, HDFC Securities told PTI.
Forex traders said market participants are hopeful about the US-China trade meeting on October 10.
"Most of the Asian currencies gained against the dollar after China offer to buy extra $10 billion of US Agriculture goods and open for partial trade deal," Sharma said.
Forex traders said a strong recovery in the domestic equity market and weakening of the American currency vis-a-vis other currencies overseas also helped the rupee pare initial losses.
Foreign institutional investors (FIIs) remained net sellers in the capital markets, pulling out Rs 485.24 crore on Wednesday, exchange data showed.
Brent futures, the global oil benchmark, increased 1.01 per cent to Rs 58.83 per barrel.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.09 per cent to 99.04.
The 10-year government bond yield was at 6.45 per cent on Thursday.
On the domestic market front, the BSE Sensex surged 645.97 points or 1.72 per cent to end at 38,177.95, while the broader NSE Nifty zoomed 186.90 points or 1.68 per cent to 11,313.30.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 70.9763 and for rupee/euro at 77.9282. The reference rate for rupee/British pound was fixed at 87.4182 and for rupee/100 Japanese yen at 66.41.