The U.S. imposition of visa restrictions on Chinese officials, and the blacklisting of Chinese firms, over the treatment of Muslim minorities have cast a pall over trade discussions scheduled in Washington for the rest of the week.
The resulting risk aversion had bolstered the dollar overnight, which is seen as a safe-haven owing to its position as a global reserve currency.
It mostly held those gains in Asian hours, though trade was wobbly as investors also grappled with remarks overnight from Federal Reserve chairman Jerome Powell flagging further rate cuts and bond buying.
The greenback rose slightly to 107.14 Japanese yen and was steady at $1.0962 on the euro. It was flat around 99.093 against a basket of major currencies.
"The timing of the U.S. travel bans and company blacklists associated with human rights issues have not helped to maintain a positive backdrop to these trade negotiations," said Rob Carnell, ING's chief economist for Asia-Pacific.
"They also look likely to provoke some retaliation from China, just a day before Vice Premier Liu He is due to arrive in Washington for trade talks," he said.
Liu and U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are due to meet on Thursday.
A Chinese diplomat told Reuters that China wanted a deal.
But prospects for progress appear to be dimming as the dispute widens.
On top of the visa restrictions and corporate blacklistings, the Trump administration is also moving ahead with discussions around restrictions on capital flows into China, Bloomberg reported, citing people familiar with the matter.
"The tensions will persist through to the year-end at least," said Westpac analyst Imre Speizer in Auckland, who is not expecting the talks to deliver a breakthrough deal.
"It'll be volatile good news, bad news, repeat for the rest of the year, but overall a negative tone."
The Chinese yuan, the most sensitive currency to the trade talks, had dropped to a one-month low in offshore trade overnight, but was a little stronger at 7.1434 per dollar in onshore trade on Wednesday.
The Australian and New Zealand dollars ticked higher, with the Aussie rising 0.2pc to $0.6741 and the kiwi 0.3pc to $0.6312.
Sterling languished at $1.2214, close to its lowest since early September, on reports that talks between Britain and the European Union were close to breaking down without an exit deal.
In a telephone call on Tuesday, German Chancellor Angela Merkel told British Prime Minister Boris Johnson that a deal was "overwhelmingly unlikely," a Downing Street source said.
The Times newspaper reported Johnson also faces a fresh rebellion in cabinet, with a group of ministers poised to quit due to concerns he is leading the country into a no-deal exit.
That leaves the outcome on Oct. 31, when Britain is due to quit the EU, deeply uncertain.
"The ever-fluid Brexit saga is expected to leave the pound exposed to politically-driven bouts of volatility over the coming weeks," said FXTM analyst Han Tan.