The U.S. dollar eased back from a 10-week peak versus major peers on Tuesday, even as Treasury yields marched to fresh post-financial crisis highs, as traders awaited a potentially crucial speech from Federal Reserve Chair Jerome Powell later this week.
The yen pulled away from a nine-month trough after Bank of Japan Governor Kazuo Ueda met with the prime minister, although he said exchange-rate volatility was not discussed.
China's yuan briefly popped to a one-week high as the central bank again tried to bolster the currency by setting a much stronger-than-anticipated daily mid-point, but those gains fizzled out quickly.
The U.S. dollar index =USD - which measures the currency against six developed-market counterparts, including the yen and euro - slipped 0.14% to 103.18, but remained not far from Friday's high of 103.68, a level not seen since June 12.
"Surging long-term U.S. yields and the underwhelming response by China's policymakers to ongoing stresses in China's property and financial markets continue to provide bullish impulse" to the U.S. dollar, Richard Franulovich, a currency strategist at Westpac, wrote in a note.
"If Chair Powell keeps the door ajar to (rate) hikes," in his speech on Friday at the central bank's annual symposium in Jackson Hole, Wyoming, "a new front for US$ upside can form," with the dollar index potentially breaking above 104, he said.
Benchmark 10-year U.S. Treasury yields US10YT=RR pushed to the highest since November 2007 at 4.366%, as the view that U.S. rates will stay high for longer continued to firm in the market's mind.
Money markets currently lay a bit less than 50/50 odds for another 25 basis point Fed hike by November, before the central bank shifts to rate cuts next year. FEDWATCH
The dollar-yen pair, however, shook off the rise in U.S. yields to trade 0.22% lower at 145.935 JPY=EBS . Traders are wary of intervention after levels around 146 spurred the first yen buying by Japanese officials in a generation last September.
On Thursday, the dollar reached 146.565 yen for the first time since Nov. 10.
The euro EUR=EBS added 0.15% to $1.0912. Sterling GBP=D3 gained 0.16% to $1.27765.
Meanwhile, China's central bank set the yuan mid-point at 7.1992 per dollar on Tuesday, 1105 pips firmer than Reuters' estimate, attempting to keep a floor under the currency following its slide to a 9-1/2-month low of 7.349 in offshore trading last week. CNH=D3
Tuesday's fixing follows shallower and narrower interest rate cuts than markets had expected a day earlier, as Beijing stimulus measures continue to underwhelm despite increasing problems in the property sector and the economy as a whole.
The offshore yuan was little changed at 7.2934, after firming as much as 0.25% after the fixing.
The Australian dollar AUD=D3 , which often trades as a proxy to China, was also little changed at $0.6417.
The Aussie has grinded higher in recent sessions after dropping to a 9-1/2-month low of $0.6365 on Thursday.
"It will likely take a big Chinese stimulus package focused on commodity-intensive infrastructure spending to turn around the downtrend in AUD/USD," Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia, wrote in a note, adding there is a "growing risk" for a dip below $0.60 this year.
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