The Chinese yuan declined against the dollar given heavy buying of the greenback by state-owned banks, which indicated the People's Bank of China was using new strategies to fuel two-way trades and limit the Asian currency's gains.
Dollar/yen is still reeling from the whole China story. I think the market hasn't figured out yet how much China will let the yuan appreciate, said Steven Butler, director of FX trading at Scotia Capital in New York.
China said on Monday it will allow the yuan to appreciate gradually, ruling out a one-off revaluation. Analysts said a modest yuan appreciation would do little to significantly reduce China's huge trade imbalance with the United States.
Some investors saw less of a boost to the world economy from China's yuan move than previously expected.
Overall, I think there is still some risk aversion in the market, which has caused a bit of yen buying.
In early afternoon trading, the dollar was down 0.5 percent versus the yen to 90.59 JPY=, while the euro dropped 0.5 percent as well at 111.42 yen EURJPY= but was little changed against the dollar at $1.2303.
The single euro zone currency recovered from the day's lows as U.S. equities recouped some of their losses, prompting short-covering in the euro and pushing it above $1.23.
The 25-day rolling correlation between euro/dollar and the S&P 500 remained at a solid 59 percent on Tuesday, making the currency one of the proxies for risk appetite.
Overall, traders said there were more euro sellers than buyers as euro zone bank woes returned to the fore after French bank Credit Agricole (CAGR.PA) pushed back profit targets for its struggling Greek unit Emporiki (CBGr.AT) on Tuesday and said it will take a 400 million euro ($536.7 million) write-down as Greece fights its debt load.
A ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement on Monday that it had raised estimates for loan losses for Spain's banking sector continued to weigh on the euro and , analysts said.
The Credit Agricole, BNP news has all brought back into the limelight the likelihood of structural problems in the euro zone, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington, D.C.
Market participants said the euro would face more losses, but technical analysts said near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low around $1.1875 on June 7 to Monday's high.
In other currencies, the Swiss franc extended gains to an all-time high against the euro after the Swiss central bank's vice chairman said the bank would not intervene in markets for now. [ID:nLDE65L1LC].
The euro fell to a low of 1.3588 francs EURCHF=EBS on the EBS platform, with options barriers at both 1.3650 and 1.3600 giving way.
Sterling, meanwhile, fell to a session low against the dollar GBP= but then recovered to trade 0.7 percent higher on the day at $1.4840, as investors reacted positively to UK Finance Minister George Osborne's first budget.
Clearly, one of the main drivers is the pound. Once the pound took off, that pushed euro/sterling lower, although that was not enough to pressure euro/dollar as the latter is moving in tandem with equities, said Scotia's Butler.
Gains in the pound were mostly positioning. Markets were looking for stops above $1.4680 that helped cable a lot.
(Additional reporting by Nick Olivari; Editing by Andrew Hay)