The rupee ended at 85.08/12 to the dollar, up from Monday's close 85.31/36.
"Dollar demand from importers has not been too high in the last few days, which has supported the rupee," said a dealer at a local bank.
Healthy dollar inflows in the form of remittances from Pakistanis abroad as well as dollar sales from exporters have also helped the rupee gain value, dealers said.
"I think the rupee will hold steady in coming days. There will be some up and down depending on import payments, but that is normal and the currency should largely stay stable," said another local bank dealer.
"The range for the rupee is expected to be 84.80 to 85.60 to the dollar in the near to medium term," he added.
Stocks, meanwhile, fell on thin trade as investors remained cautious over growing political uncertainties in the southern province of Sindh.
The Muttahida Quami Movement (MQM), a key ally of the ruling Pakistan People's Party, accused the Sindh home minister of associating with criminals, raising concerns that political instability could lead to violence.
The PPP in Sindh has publicly denied the accusation.
MQM is expected to meet Zardari soon and media reports have suggested that they may pull out of the provincial government.
"Investors were cautious and preferred to stay on the sidelines and wait and see how the political situation develops," said Mohammed Sohail, chief executive of brokers Topline Securities.
The Karachi Stock Exchange's (KSE) benchmark 100-share index ended 0.29 percent, or 34.54 points, lower at 11,940.01.
Turnover fell to only 54.21 million shares, compared with 111.84 million shares traded on Monday.
In the money market, overnight rates ended at 12.5-13.0 percent, marginally lower than the previous day's close of 13.0-13.5 percent.