The euro hit an all-time low versus the Swiss franc, while the Japanese yen rallied on Tuesday as investors pulled back sharply from riskier assets.
Markets are skittish about the outlook for U.S. growth after a string of lackluster reports. Fears over euro zone financing weighed on the euro and global equities.
Declines in the European currency accelerated after a report showed a steep fall in U.S. consumer confidence.
Traders also cited significant U.S. dollar short-covering ahead of the monthly payrolls report on Friday that provides a key reading on the U.S. economy.
It's not a good time to be long risk, said Douglas Borthwick, head of trading at Faros Trading LLC, a full service FX execution firm in Stamford, Connecticut.
The yen rallied 2 percent versus the euro and 1 percent against the greenback as European and U.S. stocks fell, raising the safe-haven appeal of the Japanese currency, along with the Swiss franc. Meanwhile, higher-risk currencies such as the Australian and New Zealand dollars took a beating.
Lower U.S. government bond yields, with 10-year Treasury yields US10YT=RR below 3 percent for the first time since April 2009, also prompted investors to cut short positions in the Japanese currency, weighing on dollar/yen.
With month-end risk reduction, coupled with a touchy number on Friday compounded by model accounts adding to risk aversion trades, (today's) moves could be the tip of the iceberg, Borthwick added.
In late morning trading in New York, the dollar rose 0.6 percent against a basket of major currencies .DXY.
The euro EURJPY=R was down nearly 2 percent after hitting a session low of 107.33 yen, its weakest since late 2001. It fell to 1.3197 francs EURCHF= according to Reuters data, the lowest since the single currency's 1999 launch.
The franc has gained broadly since the Swiss National Bank this month backed off its pledge to intervene in the currency market to stem its strength. Comments from policymaker Jean-Pierre Danthine on Monday bolstered this view.
The absence of the SNB has opened up the door to 1.30 in euro/Swiss franc, said Borthwick.
Against the dollar, the euro gave up 1 percent on the day to hit a two-week low of $1.2152 EUR= earlier, according to Reuters data.
Euro zone banks must repay 442 billion euros ($539 billion) on Thursday borrowed a year ago at low rates as part of the European Central Bank's efforts to boost liquidity. Investors fear this could leave banks facing a liquidity shortfall.
The ECB holds a three-month tender on Wednesday which many in the market expect will be tapped as banks scramble to pay back the one-year funds. Expectations are that 210 billion euros will be allotted at the offer.
ECB Governing Council member Ewald Nowotny said the ECB is not considering offering banks another batch of 12-month loans to replace those expiring on Thursday.
The funding needs reflect persistent stress in the banks of euro zone countries including Portugal, Italy, Spain and Greece.
Europe's main barometer of investor anxiety, the VDAX-NEW volatility index .V1XI, rose more than 10 percent, hitting its highest level in three weeks.
Investors dumped higher-risk currencies including the Australian AUD=D4 and New Zealand dollar NZD=D4, which each fell more than 2 percent versus the dollar and around 2.5 percent versus the yen.
The yen rose and the dollar fell after the report showing U.S. consumer confidence fell steeply in June after rising for three months, due to worries about the labor market.
Consumer confidence is fairly closely tied to consumer spending and obviously retail sales, so this bodes ill for the U.S. economy and perhaps the global economy to some extent as well, said Andrew Busch, a currency strategist at BMO Capital Markets, in Chicago.