The Indian rupee pared its initial gains, while holding its 16-months highs by 28 paise to 65.41 in late morning deals, on the back of continued unwinding of dollars from banks and exporters amid heavy foreign capital inflows and strong equities.
Weak dollar overseas also lifted the rupee sentiment, a forex dealer said.
Earlier, the rupee resumed higher at 65.40 as against yesterday's closing level of 65.69. Later, it strengthened sharply to 65.21 before trading at 65.41 at 1020 hours.
The domestic currency hovered in a range of 65.41 and 65.21 during morning deals.
Meanwhile, the dollar index was trading lower by 0.17 per cent at 100.57 against a basket of six currencies in late morning trade.
Overseas, the US dollar struggled at one-month low against basket currencies in early Asian trade, after the Federal Reserve sounded less hawkish than anticipated on future rate hikes, while the euro stood tall after Dutch exit polls pointed to a comfortable win by Prime Minister Mark Rutte over his far-right rival Geert Wilders.
Meanwhile, the benchmark Sensex rallied, trading higher by 164.93 points, or 0.58 per cent, in late morning deals.