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"Ten-year Treasuries have crossed that psychological border, 1.5 per cent. Amongst major economies around the world, it's tough to get 1.5 per cent return on a currency and now the dollar interest rates are pushing in that direction so it makes (the dollar) more attractive."

Risk aversion exacerbated the currency market moves, Jones said, with equity markets down.

The Australian dollar, which is seen as a liquid proxy for risk appetite, was down 0.5 per cent at $0.72525.

The euro was down 0.1 per cent versus the dollar at $1.1686 .

"Amidst the many cross-currents in FX markets right now - energy, Evergrande, US debt ceiling, Delta - one theme that seems to be gaining traction is that the market lies on the cusp of re-assessing the path for the Fed tightening cycle," ING strategists wrote in a note to clients.

"A big move higher in the short-end is the key reason why we are bullish on the dollar, particularly from 2Q next year, but we will closely monitor and re-assess whether that move needs to come earlier - largely a function of timing the take-off in short-end rates."

The Japanese yen dropped to its lowest in nearly three months against the dollar, down 0.3 per cent on the day at 11.385 as of 1140 GMT.

The yen is the G10 currency most correlated with US two-year and 10-year Treasury yields, MUFG currency analyst Lee Hardman said in a note to clients.

"Upward pressure on US yields should continue to provide a lift for USD/JPY in the near-term," he said, though he added the yen is "deeply undervalued," which could limit the extent of the weakness.

ING strategists said the yen's weakness was also due to Japan's role as a large energy importer. Oil prices climbed for a sixth day on Tuesday and prices of liquefied natural gas (LNG) and coal also rose.

Minutes from the Bank of Japan's July meeting showed that some central bank policymakers warned of the risk of a delay in the country's economic recovery.

The British pound was down 0.7 per cent at $1.361. The currency jumped last week after a hawkish tone by the Bank of England, but analysts struck a cautious note on the currency as Britain struggled with supply chain chaos.

The offshore yuan was steady at 6.4606.

China's central bank said it would protect consumers exposed to the housing market on Monday and injected more cash into the banking system as the Shenzhen government began investigating the wealth management unit of ailing developer Evergrande.

Power shortages in China have stopped production at many factories. Goldman Sachs estimated that as much as 44 per cent of China's industrial activity has been hit.

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