In the global market, dollar fell against most of its rivals on Monday.
The dollar index was down by 0.02 per cent against a basket of six major currencies.
Fresh demand for the American unit from importers put pressure on the rupee.
On Tuesday, the rupee had gained 10 paise to close at 66.52.
Fresh demand for the American unit from importers put pressure on the rupee.
In New York, the dollar fell against other major currencies on Monday after a December reading on the US services sector came in below market expectations.
Forex dealers said besides robust month-end demand for the American currency from oil importers, dollar's strength against its rival currencies on expectations of rising interest rates amid lingering Sino-US trade tensions, weighed on the domestic currency.
At the Interbank Foreign Exchange market, the domestic currency commenced weak at 55.68 a dollar from Monday's close of 55.57 against the dollar.
The rupee on Monday gained for the first time in three days and closed up 12 paise to 62.56 against the dollar on fag-end sales of the US currency.
There was sustained selling of the American currency by exporters ahead of a decision of US Federal Reserve on tapering its monetary stimulus.
Rupee gained on fresh selling of dollars by banks ahead of the RBI policy meeting.
Weakness in the dollar against some other currencies overseas, supported the rupee
On Tuesday, the rupee had declined marginally by 3 paise to 66.03.
Appreciation of the dollar overseas amid a lower opening in the domestic equity market affected the rupee
A higher opening in domestic stock market supported the rupee.
The rupee on Monday fell by 40 paise to 59.96 in early trade on the Interbank Foreign Exchange market, weighed down by dollar's gains against other currencies in global markets.
The rupee had ended 47 paise higher at 60.14 against the US currency in the previous session.
A higher opening in the domestic equity market and a weak dollar against other currencies overseas on a string of disappointing US data last week also supported the gain in the rupee
Weakening of the dollar against other currencies overseas, following disappointing economic data and a higher opening in the domestic equity market, supported the rupee.
The dollar index, a gauge of six major currencies, was down by 0.13 per cent as it lost ground against the euro following a better-than-expected survey of German sentiment.
The fall would have been much more pronounced, had there not been sustained capital inflows worth of over $100 million in equities, forex dealers said.
Forex dealers said besides dollar weakening against the euro in overseas markets, higher opening in the equity market and increased foreign funds inflows mainly supported the rupee.
Banks and importers preferred to increase their dollar position at the current level, a forex dealer said.
The US dollar bought 99.40 yen in Asian trade, compared with 99.21 in North American trade late on Monday.
Despite a heavy battering, the rupee on Tuesday made a smart recovery to close at 63.25 after hitting a fresh low of 64.13 against the US dollar, helped by RBI's massive intervention.
At the Interbank Foreign Exchange market, the domestic unit resumed lower at 54.42 a dollar from last weekend's close of 54.28 and declined further to a low of 54.52 on initial hesitancy in share markets and dollar demand from importers, mainly oil refiners, and some banks.
The dollar was firm against some global currencies.
The rupee had lost 23 paise to end at 54.09 in Tuesday's trade due to month-end dollar demand.
This is the first time since June 27 that the domestic currency has fallen below the 60 level.
Foreign institutional investors pumped in nearly $60 million (Rs 321.26 crore) into local equities, according to BSE provisional data.
The rupee had rose by a staggering 80 paise, its biggest single-day gain in last nine months, to close at 59.39 amid signs of strong fund inflows on Friday.
Fresh dollar selling by exporters on hopes of fall in the USD after downward revision to that country's first quarter GDP growth also helped rupee recover as hopes surfaced that the Fed may delay the plan to taper of monetary stimulus.
Forex dealers said month-end dollar demand from oil importers and dollar's gain against other currencies overseas, also put pressure on the rupee.
Forex dealers said Euro's weakness against the dollar overseas also put pressure on the rupee.
Traders will watch out for any Reserve Bank of India intervention to prevent the rupee from weakening further.
A sluggish dollar movement in overseas markets and continued capital inflows restricted the rupee fall to a major extent, forex dealers said.
The rupee's upward movement was aided by a good dose of dollar selling by exporters and some banks, amid a weak dollar overseas, said forex dealers.
At the Interbank Foreign Exchange market, the local unit commenced strong at 54.40, which was also to be the day's high, as against previous close of 54.57.
At the Interbank Foreign Exchange market, the rupee resumed stable at its overnight closing level of 54.75 and immediately touched a low of 54.78.
Indian stocks and the rupee have benefitted from dollar liquidity induced by the US Fed stimulus.
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