Mumbai: The rupee strengthened towards three-week high on Friday, recovering smartly from an early fall to a one-week low on arbitrage trade and as the dollar’s drop versus majors and gains in local shares cheered.

The partially convertible rupee closed at 46.31/32 per dollar, off a low of 46.75, its lowest since 6 November and 0.8% stronger than its previous close of 46.66/67.

On Wednesday, the rupee had risen to 46.29, its strongest since 20 October.

Dealers said there was a lot of arbitrage as bankers took advantage of the rupee’s stronger rate against the dollar in offshore non-deliverable (NDF). One-month NDF was quoted at 46.22/32.

Banks with access to both the onshore and offshore markets could buy dollars in the offshore market and sell them onshore, to profit from the price differential, thus, helping the rupee in the spot market.

The dollar’s weakness against major units overseas also helped the local unit. The index of the dollar against six major currencies was down 0.3%.

The dollar fell on Friday, paring some of the previous day’s gains, while the euro garnered support from data showing the euro zone pulled out of recession in the third quarter.

Ahead of a visit to Asia by US President Barack Obama, traders said there were rumours China would revalue its currency, which had boosted the rupee.

“I think (dollar) will open higher on Monday if nothing happens in China,” said Ashtosh Raina, head of foreign exchange trading, at HDFC Bank.

Indian shares rose 0.9% on Friday, with the market posting its biggest weekly gain in 11 weeks on strong foreign fund inflows.

Fund flows into stocks are a driver for the rupee. Foreign investors have bought a net $14.9 billion of shares so far in 2009, after selling more than $13 billion last year. The inflows have helped the rupee recover from its record low of 52.2 in early March.

In the currency futures market, the most traded near-month contracts on the National Stock Exchange and MCX-SX closed at 46.3925 and 46.3950 respectively, with the total traded volume on the two exchanges at about $3.8 billion.