The safe-haven yen rose on Tuesday as investor risk aversion mounted following a sharp drop in crude oil and stocks that has rekindled concerns about the strength of the global economy.
Growing fears of deflation in the euro zone have pushed the euro to near nine-year lows and raised pressure on the European Central Bank to ease monetary policy soon. After a brief respite overnight, the battered single currency resumed its downward move on Tuesday.
Persistent weakness in oil prices and political uncertainty in Greece ahead of a snap election this month have spooked investors and sent Wall Street to its biggest one-day fall in about three months on Monday. Asian stocks floundered while European shares were subdued in early trade, underpinning safe-haven flows.
The dollar dipped to as low as 118.65 yen from Monday's high of 120.68, moving further away from a seven-year peak of 121.86 set last month. The dollar also fell against the Swiss franc, trading slightly lower at 1.00655 francs.
"Global risk sentiment has been hurt by sliding stocks and oil prices. That is leading to a perception that there is a lack of demand and that has implications for global growth," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"But I would be a bit cautious about extrapolating too much so early in the year. This dip in risk appetite is likely to be temporary, and we should see the dollar recover against the yen and expect the euro to head lower."
Read MoreThe real risk of Greek election
A sharp fall in U.S. Treasury yields also undermined the dollar versus the yen, with 10-year yields diving 14 basis points in just two sessions. But traders said expectations that the U.S. labour market was recovering were likely to limit a sharper drop in U.S. yields.
"The key theme of monetary policy divergence remains firmly in place, and I don't see the dollar declining much more against the yen," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
The euro last traded at $1.1935, not far from the $1.1860 area hit on Monday, a level not seen since early 2006. Constant chatter of a Greek exit from the euro zone further sapped confidence in the currency.
A slide in crude oil prices hurt commodity currencies such as the Norwegian crown, which hit a three-week low of 7.6910 crowns per dollar. Buffeted by a drop in oil prices, the Norwegian currency had slid to a 12-year low of 7.8558 crowns against the dollar in December.
The Canadian dollar was also trading subdued at C$1.1765 per U.S. dollar, not far from a 5-1/2 year low of C$1.1818 struck on Monday.