The rupee appreciated 71 paise to 80.69 against the American currency in early trade on Friday, as moderating US CPI data coupled with the fall in the dollar index boosted investor sentiments.
Forex traders said factors like positive domestic equities and weakness in crude oil prices also supported the local unit.
At the interbank foreign exchange, the domestic unit opened at 80.76 against the dollar, then gained further ground to touch 80.69, registering a rise of 71 paise over its previous close.
On Thursday, the rupee appreciated 7 paise to close at 81.40 against the US dollar.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.02 per cent to 108.18 on cooling US CPI data.
US headline CPI print came in at 7.7 per cent year-on-year (0.4 month-on-month). Core CPI print which excludes the volatile food and energy components also came in lower at 6.3 per cent year-on-year (0.3 per cent month-on-month), IFA Global Research Academy said in a note.
"We expect the dollar index to remain weak and could test 105.00 levels in the short-term," said Rahul Kalantri, VP of Commodities, Mehta Equities Ltd.
Brent crude futures, the global oil benchmark, advanced 0.27 per cent to USD 93.92 per barrel.
"We expect the rupee could gain strength in today’s session after a sharp fall in the dollar index and could test 80.80 levels in upcoming sessions," Kalantri added.
In the domestic equity market, the 30-share BSE Sensex was trading 1021.78 points or 1.69 per cent higher at 61,635.48. Similarly, the broader NSE Nifty rose 282.70 points or 1.57 per cent to 18,310.90.
Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Thursday as they purchased shares worth Rs 36.06 crore, according to exchange data.