RTRS: Indian rupee pulled off 2-wk high by late dlr rise
* Euro slips vs dollar after pvs session sharp rally
* Stocks at highest close in 2 wks, foreign buying revives
* Rupee to rise to 44/dlr over next 12 months - Barclays Cap (Updates to close)
By Swati Bhat
MUMBAI, Feb 17 (Reuters) - The Indian rupee retreated from two-week highs on Wednesday after the dollar climbed against some majors, but firm domestic equities kept the undertone bullish.
The partially convertible rupee INR=IN ended at 46.11/12 per dollar after hitting 45.95 early, its highest since Feb. 3, but still 0.2 percent stronger than 46.21/22 at close on Tuesday.
"The euro started coming off against the dollar in late trade which weighed on the rupee. There is strong technical resistance at 1.3800 for the euro," a senior trader with a private sector bank said.
"The market was mainly looking at local and regional sharemarket moves today," he added.
Shares climbed for a second day rising 1.25 percent to their highest close in two weeks, as foreign appetite for risk revived on the back of higher world equities. [.BO]
Foreign funds were net buyers of $122.45 million in the last two days, after dumping $2 billion over 13 preceding sessions. Last year, record inflows of $17.5 billion had helped the rupee rise 4.7 percent.
Gains in regional peers added to the bullishness for the rupee. The South Korean won and Malaysian ringgit led a broad rally in Asia on Wednesday, riding on the euro's early strength against the dollar. [EMRG/FRX]
However, towards the close of session, the index of the dollar .DXY against six major currencies was up 0.24 percent. It had been down 0.2 percent earlier in Asian trade.
The one-month onshore dollar premium in the Indian rupee forwards continued to trade at its lowest level in 16 months as traders exploited the difference between the onshore and offshore markets.
One-month onshore dollar premium closed at about 6 points after having fallen to 5.25 points at close on Tuesday, its lowest since Oct. 15, 2008. One-month offshore non-deliverable forward (NDF) contracts PNDF were at 46.10.
"The arbitrage game has been on from the last two days, foreign banks are receiving here and paying in the NDFs," said Nitesh Kumar, an inter-bank dealer with Development Credit Bank.
The spread between the one-year onshore and offshore rates has narrowed to 0.44 rupee from 0.67 on Tuesday, with the one-year NDF INR1YNDFOR= being quoted at 46.80 and onshore INR1Y= at 47.24.
"We project the INR will strengthen to 44/USD in one year. With an inflation differential of 3.5 percent and our cross-rate forecasts, this implies the real effective exchange rate (REER) rising to 102.5," Barclays Capital economists said in a note.
"However, our projections are sensitive to our cross-rate assumptions -- especially the potential for a resurgent USD -- and this has the potential to weigh on the INR now," Peter Redwood and Rahul Bajoria wrote.
In the currency futures market INRFUTURES, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 46.1225 and 46.1250 respectively, with the total traded volume on the two exchanges at about $4.8 billion. (Editing by Ranjit Gangadharan)
