By Jaspreet Kalra

MUMBAI, Feb 20 (Reuters) - The Indian rupee topped gains among major Asian currencies and settled at a one-week high on Thursday, aided by dollar sales from foreign banks and softness in the greenback.

The rupee INR=IN closed at 86.66 against the U.S. dollar, up 0.3% on the day. It was the best performer among regional peers that rose amid gains in the Chinese yuan and Japanese yen.

While U.S. President Trump's remark that a new trade deal with Beijing is possible lifted the yuan, the yen hit its strongest level in more than two months as investors ramped up bets on further rate hikes from the Bank of Japan.

The dollar index =USD was hovering just shy of the 107 handle, down 0.2% on the day, while the yen JPY= and the offshore yuan CNH= rose 0.8% and 0.2%, respectively.

Strong dollar sales from foreign banks throughout the session also helped the rupee, a trader at a private bank said.

The rupee faced significant depreciation pressure until early last week and hit an all-time low of 87.95, but that waned following heavy-handed intervention by the central bank.

A multitude of factors have weighed on the rupee over recent weeks including persistent portfolio outflows, uncertainty about global trade policies and expectations of policy easing by the Reserve Bank of India (RBI).

While the RBI's recent rate cut indicates a clear desire to support growth, "it may not be prudent to view this as proving a green light to opening the door to one way depreciation. Instead, the light is amber and USD/INR is on pause for now," Bank of America said in a note.

Jefferies reckons the rupee is likely to keep drifting lower through 2025 but is unlikely to be hurt significantly by reciprocal U.S. trade tariffs floated by Trump.

(Reporting by Jaspreet Kalra; Editing by Mrigank Dhaniwala)

((jaspreet.kalra@thomsonreuters.com))