The Australian dollar gave way to waves of selling after investors bet the stellar gains of recent weeks were overdone.
The Aussie pulled back to 91.97/92.00 US cents at the local close, down from the day's high of 92.56 US cents. It was also buying 81.7 yen, 55.5 pence and 61.6 euro cents in recent trading.
For the year, however, it is still up an impressive 33 per cent against the US dollar, the best performer among the world's most traded currencies.
More investors now say they want to sell the Aussie due to its recent weakness, but may buy it back when the mood in market improves. That echoes what some analysts have been saying of late - that the local dollar's stunning rise has left it most vulnerable to a sharp pull-back.
"After a week of market jitters, we have taken a bit of foreign exchange risk off the table," Goldman Sachs advised clients in a note about trading ideas.
Goldman advised traders to abandon their "buy" Aussie trades, which were started when the currency traded at 91.01 US cents.
A trader with a US bank said hedge funds have been among the biggest sellers of the Aussie in recent days.
He said the Aussie was sold around 92.5 US cents on Tuesday, but losses were limited by buying from mutual funds at 91.8 US cents.
Against the yen, the local dollar slipped from the day's high of 82.39.
However, Westpac said in a note on Tuesday the yen may be poised to weaken against the US dollar in coming days, citing its proprietary probability model which signals a turning point.
That may give the Aussie a lift against the yen.
"We are also seeing a pick up in demand for higher yielding currencies such as the Aussie from Japanese retail margin accounts," Westpac said.
with