Asian markets tumbled despite news that US lawmakers had voted in favour of a plan to avoid default, amid fresh fears over the global economy and a possible US credit rating downgrade.
In Tokyo, expectations that officials could soon step into the currency markets were raised when Japan's finance minister said the yen was "strongly overvalued" after the unit approached its record high against the dollar in New York trade a day earlier.
Tokyo tumbled 1.25 per cent Tuesday afternoon, Hong Kong fell 0.69 per cent by the break, Sydney shed 1.34 per cent and Seoul fell 2.29 per cent while Shanghai dived 1.61 per cent.
The losses came a day after a rally on news that an 11th-hour deal had been struck between the White House and party leaders to raise the country's debt ceiling and avoid a catastrophic default on US sovereign debt.
On Monday the House of Representatives voted in favour of the deal and it must now go to the Democrat-led Senate, where it is also expected to pass.
However, despite the news - which brought to an end months of bickering - dealers turned their attention to the possibility that the US AAA credit rating could be downgraded for the first time ever.
Such a move would push up US interest rates, making debt payments more expensive and hitting the already spluttering US economy, still grappling with historically high unemployment of 9.2 per cent.
Adding to traders' woes was a raft of weak figures from the United States and other major economies.
Earlier Monday the United States said manufacturing slowed to a near standstill in July, days after it announced the economy grew only 1.3 per cent in the second quarter, after 0.4 per cent in the first - the weakest growth since it exited recession two years ago.
The imminent end to the US debt saga "lifts an overhang on global markets but we think deteriorating growth outlook is the bigger overhang", ING Financial said in a note to clients, according to Dow Jones Newswires.
China, an economy on which many other nations rely to drive growth, also slowed abruptly - with one survey suggesting contraction - while there was similar bad news in Australia, Taiwan and India.
The poor economic figures hit Wall Street, which closed before the debt vote.
The Dow shed 0.09 per cent, the S&P 500 dropped 0.41 per cent and the Nasdaq dropped 0.43 per cent.
Eyes are also on the release Friday of key US jobs figures, which will provide another snapshot of the state of the economy.
On currency markets the US dollar fell briefly to 76.29 late in New York on Monday - near its post-World War II low of 76.25 yen, reached on March 17 in the wake of the Japanese earthquake and tsunami.
The yen's surge then prompted a joint intervention by Japan and other members of the Group of Seven.
The greenback firmed in Tokyo and was at 77.43 yen in the afternoon, helped by the US vote.
However, Japanese authorities remain ready to step in at any point, a person familiar with the country's currency policy affairs told Dow Jones Newswires on Tuesday.
"Japan can conduct intervention at any time," the source told the wire.
But the source declined to say how close the authorities were to taking action.
The euro rose to $US1.4255 from $US1.4248, and to 110.39 yen from 109.98 yen.
AFP