The rupee recovered from a one month low level to close higher by 13 paise at 67.06 a dollar on the back of selling of the US currency by banks and exporters.
Weakness in the dollar in overseas markets along with continued optimism over capital inflows predominantly boosted the rupee value, dealers said.
Unwinding of long dollar positions by banks too aided the sentiment, they added.
The domestic currency had closed at one-month low of 67.19 against US currency on Monday amid fears of rate hike by the US Federal Reserve.
The domestic unit opened slightly higher at 67.14 at the Interbank Foreign Exchange (Forex) market. It maintained the strong recovery momentum throughout the trade and touched an intra-day high of 67.04 in late afternoon trade.
The rupee finally ended at 67.06, showing a good gain of 13 paise, or 0.19 per cent.
Meanwhile, foreign portfolio investors (FPIs) withdrew Rs 1,326.95 crore from debt and equity markets yesterday, according to the provisional data.
The Reserve Bank fixed the reference rate for the dollar at 67.0885 and euro at 76.0381.
In cross—currency trades, the rupee weakened further against the pound sterling and finished at 88.42 as compared to 88.08 and drifted against the euro to end at 76.05 from 75.96 yesterday.
It also fell against the Japanese yen and settled at 66.97 per 100 yens from 66.82 earlier.
In the meantime, equities snapped a two-day decline and ended marginally higher on the back of renewed buying in IT counters as the BSE Sensex moved up 4.67 points to close at 27,990.21 while Nifty gained 3.45 points to 8,632.60.
In the forward market, premium for dollar continued to trade sluggish owing to sustained receivings from exporters.
The benchmark six-month premium for January eased to 175-177 paise from 176-178 paise and the forward July 2017 contract also edged lower to 374-376 paise from 375-377 paise yesterday.
On the global front, US dollar slipped against the other major currencies as investors locked in profits from the greenback’s recent rally despite positive remarks on interest rates by Federal Reserve officials.
The US dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was down 0.24 per cent at 94.30 in early trade.
