The Aussie dollar crept up to $0.7119 and further away from the recent 32-month trough at $0.7041. It now needs to clear stiff chart resistance at $0.7142/46 to extend the rally.
Speculators were squeezed out of short positions as US Treasury yields retraced some of last week's steep rise, easing to 3.21 percent from a seven-year peak of 3.26 percent.
The US dollar's yield advantage over the Aussie has been widening for months and reached its biggest-ever last week at around 51 basis points.
"The spread widening in early October was eye-catching and looked to be a key driver of the fresh Aussie lows," analysts at Westpac wrote in a note.
"This implies short term risks towards $0.6900," they added. "But Australia's key commodity prices are substantially higher than early 2016, so trade sub-$0.70 might be fairly short-lived."
Prices for iron ore climbed above $70 per tonne on Tuesday for the first time since late March as Chinese steel mills restocked after a week-long holiday.
Iron ore is Australia's single-largest export earner and China buys over 80 percent of the country's shipments.
Data showed Australian consumer sentiment had rebounded a little this month after a sharp drop in September, though concerns remained about falling home prices.
The Melbourne Institute and Westpac Bank index of consumer sentiment rose 1.0 percent in October, after a 3 percent drop the previous month.
The New Zealand dollar inched ahead to $0.6490, but remained uncomfortably close to Monday's low of $0.6424. Resistance is lined up around $0.6500 and the overall technical trend is still downward.
The only domestic data from New Zealand showed retail spending via electronic cards rose a solid 1.1 percent in September, up 5.7 percent from the same month a year ago.
The series covers about 68 percent of core retail sales in the country and points to an upbeat outcome for consumer spending over the third quarter as a whole.
New Zealand government bond prices and Australian bond futures firmed a touch in line with Treasuries.
The three-year Aussie bond futures contract rose half a tick to 97.860, while the 10-year contract added 2.5 ticks to 97.2350.