"There has been so much complacency stemming from the notion that systemic risk has diminished just because we are not seeing any high-profile rescue operations such as Bear Stearns," said Ashraf Laidi, chief FX strategist at CMC Markets in New York.
"People have an erroneous sense of comfort and it is absolutely ridiculous to think the worst is behind us."
A collapse of Bear Stearns, which had been the fifth biggest U.S. investment bank, was averted last month when the Federal Reserve stepped in and helped arrange its sale to JPMorgan Chase.
US stocks fell sharply on Friday, dragging the dollar lower against the low-yielding Japanese yen and Swiss franc.
The stock market is regarded by investors as a barometer for risk appetite.
"GE is a good proxy for the U.S. economy. The weakness in GE (profits) has raised concerns over the weakness of the US economy. That put some pressure on the dollar," said Ronald Simpson, director of FX research at Action Economics in Tampa, Fla.
"The biggest loser has been dollar/yen because it is significantly correlated to the U.S. equity market's performance."
The dollar dropped to a session low of 100.66 yen and was last trading down at 101.07 yen, down 0.8 percent on the day. The euro fell 0.4 percent to 159.66 yen.
Carry Trades Unwound
The Japanese currency also rallied against the New Zealand and Australian dollars as concerns about the US economy encouraged investors to unwind carry trades, which are funded by borrowing in low-yielding currencies such as the yen and investing in currencies and assets offering higher returns.
The Swiss franc also came to the party, with the dollar falling 0.6 percent to 1.0014 francs, while the euro slipped 0.3 percent to 1.5819 francs.
Low-yielding currencies such as the yen and Swiss franc tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their countries.
The euro closed in on this week's record high, supported in part by speculation that Group of Seven financial officials may not make a coordinated effort to talk up the dollar when they meet later in the day.
But the euro's gains were capped as a report showing an unexpected jump in US import prices in March reminded investors about swelling inflationary pressures, which could limit the Fed's ability to continue cutting interest rates.
The euro was last up 0.3 percent at $1.5791 after rising to a session peak of $1.5819 and not far from a record high of $1.5902 hit in the previous session, according to Reuters data.
Analysts said the market was also reluctant to drive the dollar too much lower ahead of the G7 communique, but many did not expect any change in the group's language on currencies.
"There is some event risk associated with the G7 meeting, but I don't think there will be much of substance to come from the G7 communique. The market overall will pull back a little bit and not push the dollar too hard on Friday," said Action Economics' Simpson.
"If we see nothing really concrete coming from the G7, the dollar might have some problems on Monday."
The euro hit a record high versus sterling at 80.35 pence on speculation of further interest rate cuts in the UK and last traded up 0.3 percent at 80.10 pence.