The Chinese yuan steadied near a seven-week low against the greenback as a liquidity squeeze in the offshore yuan market in Hong Kong helped stabilize sentiment.
"The rise in U.S. yields is much more important" to the day's foreign exchange trading than Italy's fiscal problems, said Thomas Flury, head of currency strategy at UBS Global Wealth Management's Chief Investment Office in Zurich. "The market needs to digest this to see whether it's a long-term spike."
Investors dumped U.S. bonds last week on fears that domestic inflation might accelerate, prompting the Federal Reserve to hasten the pace of interest rate hikes.
On Tuesday, the benchmark 10-year Treasury yield climbed to a seven-year high at 3.261 percent before receding a tad.
An index that tracks the dollar versus six major currencies was up 0.02 percent at 95.78 after hitting a seven-week peak at 96.155.
Sparring between Washington and Beijing on trade and Italy's proposed hefty debt target have stoked worries about slowing global growth, feeding safe-haven demand for the dollar.
The International Monetary Fund on Tuesday reduced its global growth forecasts for 2018 and 2019 to 3.7 percent from 3.9 percent for both years. Earlier, Italian Economy Minister Giovanni Tria struck a resolute tone on his controversial budget plans in Rome's parliament.
Italy's benchmark 10-year government bond yield rose toward a 4-1/2-year high. While the spike in Italian yields has not spread to other peripheral government debt, "it hurts the sentiment in Europe somewhat," Flury said.
The euro fell to a seven-week low of 1.14325. It was last at 1.1480, down 0.1 percent. The single currency was down 0.2 percent at 129.81 yen. A surging greenback is hurting emerging markets as they struggle with tighter liquidity and capital outflows.
The Indian rupee fell to an all-time low of 74.395 per dollar. The Chinese offshore yuan fell to 6.9350 yuan per dollar before retracing to 6.9239, which was marginally weaker on the day.
At the weekend, China's central bank cut requirements on bank reserves in a bid to add more liquidity into its banking system as policy-makers worried about the economic impact of a heated trade row with the United States.