The dollar advanced to a 13-month peak against a basket of major currencies as traders increased their safe-haven holdings of the USA currency on worries about the lira-related fallout.
The currency, the lira, tumbled against the dollar last week when President Trump said he was doubling tariffs on imported Turkish metals to punish Erdogan for refusing to free an American pastor now on trial in Turkey. It was up 5 percent on Tuesday, at 6.55 per dollar, having fallen 42 percent so far this year, with most of those losses coming in recent weeks. Of course, the U.S.is also feuding with over trade, so it's not outside the realm of possibility.
But the rise in USA shares did not carry through to Asia, with MSCI's broadest index of Asia-Pacific shares outside Japan sliding 0.8 percent after bouncing 0.4 percent the previous day when the lira showed signs of stabilising. Hong Kong's Hang Seng Index dropped 1.7 percent, while mainland Chinese stocks fell by more than 1 percent.
There is no sign of a halt to the deteriorating relationship between the United States and Turkey, a North Atlantic Treaty Organization (NATO) ally, host for the strategically important U.S. Air Force base at Incirlik and gateway to the Black Sea for the U.S. Navy.
Before the new measures were announced, Japan's Nikkei 225 had fallen nearly 2% in late trading.
The downdraft for emerging market currencies stopped, with the South African rand, Russian ruble, Brazilian real and Mexican peso, a proxy for emerging market currencies, all rising.
"The equity markets are waiting for the next steps after gaining strongly yesterday".
The impasse led to the depreciation of the Turkish lira, which lost 25 per cent of its value in August and impacted on other countries' currencies as well, including the Indian rupee, as investors feared the lira's wobbles could spread to developing nations.
Businessmen holding USA dollars stand in front of a currency exchange office in response to the call of Turkish President Tayyip Erdogan on Turks to sell their dollar and euro savings to support the lira, in Ankara, Aug. 14, 2018.
Turkey's weakened currency, the lira, plunged by a full 20 percent in response.
"The lira rallied yesterday, but there is not remedial plan for Turkey's internal and external imbalances".
"There are some risks to foreign banks but they are heavily concentrated in Europe", Capital Economics wrote in a research note Monday.
The euro dipped to $1.1326, its weakest since July 2017. It was last up 0.4 percent at 96.762.
The Turkish central bank has promised that Turkish banks will have all the money they need.
India's government urged people not to panic on Tuesday after the rupee slid to an all-time low against the dollar.
British gilt and French bond yields have also pulled away from multi-week lows. Speculation is also growing that Turkish policy makers will heed calls from corporate and banking executives to raise interest rates to stem the rout.
USA crude rose 80 cents to $68.00 a barrel and Brent gained 81 cents to $73.42.