Continuing its winning run for the fourth straight session, the rupee today hit its two-week high of 67.95, appreciating by 8 paise on sustained unwinding of American currency by exporters and banks.
Extremely bearish greenback overseas and robust capital inflows predominantly supported the domestic currency after a tepid start.
It largely shrugged off the early volatility amid growing optimism ahead of the annual budget with concrete policy measures to attract robust foreign flows.
The American dollar came under renewed pressure against most of its major rivals on heightened concerns about the impact of the new US administration's policies on trade and the economy after President Trump over the weekend imposed immigration curbs on seven predominantly Muslim countries.
lower-than-expected US fourth-quarter growth figures also weighed on the greenback as it dampened expectations for a faster rate of interest rate hikes against the backdrop of Fed's first policy meeting of 2017 later this week.
The local unit resumed modestly weak at 68.06 from last Friday's close of 68.03 at the Interbank Foreign Exchange (Forex) market and weakened further to 68.08 due to month-end demand from importers.
However, it made a smart rebound in mid-afternoon deals to hit a fresh intra-day high of 67.93 before ending at 67.95, showing a rise of 8 paise, or 0.12 per cent.
The rupee has strengthened by a good 25 paise in four-day rise against the dollar.
Foreign funds and overseas investors continued their portfolio buying spree and infused USD 158.80 million during the week, which also bolstered sentiment.
The US dollar index was trading slightly higher at 100.94 in late afternoon session.
The RBI fixed the reference rate for the dollar at 68.0426 and for the euro at 72.9621.
In cross-currency trade, the Indian unit also hardened against the British pound to finish at 85.11 from 85.33 per pound and also rose against the euro to settle at 72.56 as compared to 72.76 earlier.
However, it fell back against the Japanese Yen to conclude at 59.22 per 100 yens from 59.15 last weekend.
Country's foreign exchange reserves surged for the second consecutive week by USD 932.4 million to USD 360.775 billion in the week to January 20 on account of rise in foreign currency assets.
Meanwhile, domestic equities succumbed to modest profit-taking after recent steep rally amid concerns over US policies which weighed on IT stocks even as investors turned cautious ahead of the upcoming Budget on Wednesday.
Most financial markets in Asia were closed on Monday for lunar New Year holidays.
Meanwhile, the benchmark Sensex drifted 32.90 points to end at 27,849.56, while broader Nifty lost 8.50 points to 8,632.75.
In the forward market, premium for dollar continued to trade lacklustre in the absence of any market moving factors.
The benchmark six-month premium for June softened to 133-135 paise from 134.25-135.25 paise and the far-forward December 2017 contract also eased to 275.5-277.5 paise from 276.25-278.25 paise on last Friday.
Crude prices pulled back on Monday following a steep increase in US drilling activity spread concern over rising oil output as oil producing nations are trying to comply with a deal to pump less in an attempt to prop up prices.
The number of active US oil rigs rose to the highest since November 2015 last week.