Mumbai: The rupee rose to a three-week high on Wednesday, tracking gains in global risk assets after Germany's top court gave its approval to the euro zone's rescue fund, although continued oil-related dollar demand capped further gains.

The euro rose to a four-month high after the German court ruling, even as it came with conditions, while also benefitting from broad losses in the dollar after Moody's Investors Service warned U.S. credit ratings could be cut.

Global risk factors are likely to remain key drivers for the rupee, especially if the Federal Reserve embarks on further stimulus measures after its policy meeting ends on Thursday.

"Some equity market-related inflows were there today, but main factor driving rupee gains was the euro," said Uday Bhatt, senior manager for dealing at state-run UCO Bank.

"There was some dollar demand seen from oil companies. Otherwise the rupee would have touched 55 levels. The unit will continue to trade in a range of 55.00 to 55.40 in the rest of the week," he added.

The partially convertible rupee closed at 55.21/22 per dollar as per the SBI closing rate versus its previous close of 55.34/35.

The main share index closed at its highest since Feb. 23 on hopes for government reforms after the aviation minister signalled the country was moving to allow foreign direct investment into the sector.

The prospect of reforms could provide a boost to the rupee, although investors remain wary given the government has yet to deliver on other reforms such as raising fuel prices.

Unless measures are announced, traders said the next domestic focus would be on the July inflation data due on Friday. Wholesale prices are expected to have risen 6.95 percent year-on-year in August, slightly higher than July's 6.87 percent.

The Reserve Bank of India is widely expected to keep interest rates on hold unless inflation surprises to the downside.

Data on Wednesday showing industrial output rose 0.1 percent in July, just below expectations for 0.3 percent growth, failed to have much impact on domestic rupee market.

In offshore non-deliverable forwards, the one-month contract was trading at 55.44 while the three-month was at 56.04.

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 all closed at around 55.30 with a total traded volume of around USD 4.06 billion.

(Agencies)                         

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