The U.S. dollar was volatile on Tuesday following two-day losses as global financial authorities worked to stabilize the banking system.
The dollar index, which tracks the greenback's performance against six major currencies, rose slightly by 0.08 percent to 102.57 in Asia. It previously dropped by around 0.3 percent in each of the past two sessions.
The U.S. currency strengthened by 0.59 percent to 131.68 yen on Tuesday. The yen dropped by 0.5 percent against the U.S. dollar in the previous session, moving in the opposite direction from the long-term U.S. Treasury yields.
Analysts said the move on Monday was uncharacteristic of the yen because when U.S. Treasury yields rise, forex brokers and investors can borrow the yen more cheaply to purchase higher-yielding dollars. It leads to a weakened dollar against the yen.
On Tuesday, the 10-year benchmark Treasury yield hit a one-weak peak at 3.583 percent earlier in Tokyo, but the yield dropped slightly to around 3.5677 percent after reaching that peak. The 10-year yield fell to a six-month low of 3.285 percent just last week.
"U.S. bond volatility has driven most of the volatility in dollar-yen, so it makes sense that we're closer to 130 than 140 because U.S. yields are that much lower," Ray Attrill, head of foreign exchange strategy at National Australia Bank, said.
The euro traded 0.1 percent lower to $1.0834, while the sterling fell by 0.12 percent to $1.23265.
Meanwhile, the Australian dollar fell by 0.16 percent to $0.6698 after new inflation data showed that consumer price growth in Australia had slowed to an eight-month low. The data increased the probability that the Reserve Bank of Australia (RBA) would pause rate hikes in its meeting next week.
Futures tied to the RBA rate policy now imply a five percent chance of a rate increase, significantly lower than the 15 percent probability before the new data.
The risk-sensitive kiwi gained 0.13 percent to $0.6261. The market expects a 25-basis-point rate increase by the Reserve Bank of New Zealand next week.
Analysts explained that the U.S. struggle to find a solid footing on Tuesday happened as many investors moved their funds to riskier assets. Financial authorities' actions to stabilize the banking system had slightly restored the market's confidence, said analysts.
Futures of Wall Street main indexes rallied ahead of the trading session on Wednesday, indicating that the stock market will open higher. Dow futures rose by 0.53 percent, S&P 500 futures gained 0.75 percent and Nasdaq futures jumped by 0.81 percent. Previously on Tuesday, all three major indexes on Wall Street finished lower.
Authorities stabilize banking system
Earlier this week, the U.S. Federal Deposit Insurance Corporation (FDIC) facilitated a buyout for all of the deposits and loans of the failed lender Silicon Valley Bank (SVB). Commercial banking firm First Citizens BancShares agreed to buy SVB assets at a 29 percent discount.
Federal Reserve vice chairman for supervision Michael Barr also assured the public on Tuesday evening that the SVB implosion could be an isolated case caused by "terrible" risk management by the bank's executives.
One of the examples of poor risk management practice conducted by SVB was the bank's substantial holdings of Treasury notes and other bonds that lost significant value as the Fed hiked interest rates. The bank's clients were also mostly tech companies, whose ability to receive financing significantly declined in the uncertain macroeconomic environment.
"Issues in U.S. banks will remain the dominant influence on the USD in the near term."
Joseph Capurso, Strategist at Commonwealth Bank of Australia
Despite the improvement in the banking sector, analysts said investors remained vigilant about any signs of weakness there. Commonwealth Bank of Australia strategist Joseph Capurso said problems in the U.S. lenders would become a "dominant influence" on the greenback in the near term.