Treasury yields have risen this week on uncertainty about Federal Reserve monetary policy under Ben Bernanke, the nominee for new Fed chairman, amid rising inflation driven by higher oil prices.
The benchmark 10-year Treasury note's yield rose above 4.60 percent to a six-month high on Tuesday and traded just below that level on Wednesday. Yields have jumped about 20 basis points so far this week.
In late trading, the euro traded lower at $1.2068 down 0.3 percent from late Tuesday, after hitting a 2-week high of $1.2139 earlier.
The dollar rose 0.7 percent against the yen to 115.82 yen.
"The fact that Treasury yields are up and Fed funds futures are pricing in greater expectations of rate hikes well into next year have helped the dollar find a floor," said Naomi Fink, senior currency strategist at BNP Paribas in New York.
The interest rate futures market has fully priced in two more rate hikes this year and are close to factoring in another rate increase next year, analysts say.
"We have seen dollar/yen in particular go up. With yield spreads widening between Japan and the United States, that has been a major mover in the pair," said John McCarthy, director of foreign exchange trading at ING Capital Markets LLC in New York.
The euro rose to 139.80 yen just off a six-month high of 139.95 yen hit earlier in the session.
Against the Swiss franc, the dollar climbed 0.5 percent to 1.2830 francs. But sterling dipped 0.5 percent to $1.7750.
Market uncertainty about Bernanke has lifted somewhat, according to Fink, as his comments after Monday's announcement reassured investors the Fed would maintain a tightening stance to fend off inflation.
The dollar also garnered supported from inflows by US companies repatriating funds to take advantage of this year's one-time tax break, said Tim O'Sullivan, trading manager with Gain Capital in Warren, New Jersey.
But the dollar's gains against the euro were limited by Japanese investors seeking to buy euro zone bonds after the German business confidence index rose to its highest level in five years on Tuesday, analysts said. That spurred talk that the European Central Bank's next move might be a rate rise.
Markets have moved to price in prospects for ECB rate hikes in 2006, "but we believe that for the moment the upside in US rates is much more pronounced and likely to lead to continued dollar strengthening," said Todd Elmer, currency strategist with Citigroup in New York.
Also on Wednesday, the Reserve Bank of New Zealand raised interest rates, as expected, by a quarter percentage point to a record 7 percent, the highest in the industrialised world. It warned that further tightening may be needed to contain inflation.
The New Zealand dollar came off highs against the US dollar in the wake of the RBNZ decision, trading at US $0.7015 from about US $0.7027 before the rate hike.