The dollar index hit a three-month high of 91.076 against a basket of six currencies, though the big gains on rising U.S. government bond yields mostly occurred on Monday.
"Yesterday was a big day in terms of Treasury yields impacting currencies. Today, the 10-year did claw its way up to 3 percent to no big effect as far as currencies are concerned," said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York.
The U.S. 10-year Treasury yield
The dollar's gains on Tuesday drove the euro down slightly past the two-month low hit Monday, on growing concerns that firmer U.S. Treasury yields would reduce incremental demand for the region's bonds and stocks at a time when hedge funds have amassed record long bets in the single currency.
Some lingering worries that European Central Bank policymakers may signal a more cautious stance at a policy meeting on Thursday also pulled the single currency lower.
But after its sizeable fall overnight, the euro looked resilient on Tuesday, remaining well above the annual low reached in early January.
"The euro seems to be on cruise control, trading sideways, although we do believe it is going to continue its march higher," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.
The single currency
The Mexican peso has risen 4.8 percent to 18.961 per dollar in the past four trading days. The currency has been weakening on the back of polls showing left-wing presidential candidate Andres Manuel Lopez Obrador in the lead ahead of the July 2018 general election.
"The leftist leader, who is way ahead in the polls, looks like he may win and the market is questioning whether that is a positive or negative for the Mexican peso – right now it looks like it’s negative," said Borthwick.
The dollar set a 2-and-a-1/2 month high of 109.19 yen
The rise in U.S. bond yields has dented emerging market currencies and bond markets, including those in Asia.
A stronger dollar also intensified pressure on some commodity-linked currencies such as the Australian dollar
(Reporting by Kate Duguid and Saikat Chatterjee; Editing by Frances Kerry and Chizu Nomiyama)
By Kate Duguid