"The infections in Europe are getting worse than many have anticipated and some investors would naturally worry that the U.S. could soon follow a similar path," said Koichi Fujishiro, senior economist at Dai-ichi Life Research in Tokyo.
Oil steadied a day after rising 3% to a one-week high, even after the U.S. said it would release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan and Britain to try and cool prices after repeated calls for more crude failed to sway OPEC+ producers.
Brent crude futures reversed early losses to rise 0.11% to $82.40 a barrel and U.S. crude futures rose 0.31% to $78.74 a barrel.
"There's a lot going on at the moment," said senior Asia economist Carlos Casanova at Swiss private bank UBP.
"Ten-year yields are rising, and the U.S. dollar is strong, which is a little bit disruptive for Asian markets as a lot of the currencies (apart from the Chinese yuan) will depreciate and there will be some outflows on the back of widening real rate differentials."
However, Chinese asset classes have been holding up relatively well, he said, attributing the strength to the People's Bank of China removing several hawkish references from Friday's quarterly monetary policy support, indicating central bank support later this year or early next, "which will provide a floor for equities."
Chinese blue chips were up 0.3% and are up about 0.7% so far this week, versus a near 1% fall this week in the Asian regional benchmark.
Overnight, yields on 10-year U.S. Treasury notes rose more than 5 basis points (bps) to as high as 1.684% while yields on 30-year Treasury bond gained 6 bps. Two-year U.S. Treasury yields slipped having touched their highest level since March 2020 on Monday.
"There's a risk that the Fed may speed up tapering (of its bond-buying stimulus programme) and that in turn means the timetable for tightening may be brought forward, contributing to the stronger dollar," said currency strategist Sim Moh Siong at Bank of Singapore.
Investors will be scrutinising the minutes of the U.S. Federal Reserve policy committee's November meeting to be published later in the day for clues on whether the pace of its tapering could accelerate.
Non-interest bearing gold, which had reacted poorly to the rise in Treasury yields, recovered a little. The spot price was last at $1,794 up 0.2% but still close to Tuesday's two-week low.
Major currencies are largely trading based on market expectations of central banks' interest rate normalisation schedules.
New Zealand's central bank raised interest rates for the second time in as many months on Wednesday, driven by inflationary pressures and as an easing of coronavirus restrictions supported economic activity.
However, with markets having been open to the possibility of a larger hike, the New Zealand dollar weakened 0.6% to $0.6928.
The Turkish lira remained under pressure, falling almost 2% in early trade to 13.057 per dollar after a historic nosedive on Tuesday as President Tayyip Erdogan defended recent rate cuts and vowed to win his "economic war of independence".
Otherwise, currency markets paused for breath on Wednesday as the dollar largely held onto recent gains against most peers on the back of rising Treasury yields.
However, the greenback did manage to edge up marginally to hit a four-and-a-half-year top of 115.22 yen.
(Reporting by Alun John, additional reporting by Hideyuki Sano in Tokyo; Editing by Christopher Cushing and Kim Coghill) ((firstname.lastname@example.org;))