In midday trading in New York, the ICE Futures U.S. dollar index, which tracks the value of the greenback against a basket of six currencies, was up 1.3 percent at 87.081 after rising as high as 87.177, the strongest level since Oct. 28.
The euro also fell to a two-week low at $1.2519 and last traded down over 1 percent at around $1.25.
U.S. stocks tumbled as production cuts at aluminum maker Alcoa , fears of a cash drain at automaker General Motors and signs the Chinese economy is faltering heightened fears of a global economic slump.
"With the depressing news on the global economy continuing to spill out, the U.S. dollar and the Japanese yen rally,'' said Andrew Busch, global FX strategist at BMO Capital Markets in Chicago. "The recession is spreading as the credit crisis winds blow the radioactive waste further and further throughout the world.''
The yen traded broadly higher as worries over slowing growth kept up the pressure on carry trades, in which low-yielding currencies like the Japanese currency are used to buy assets in higher-yielding ones.
The dollar last traded down at above 97.5yen and the euro fell almost 2 percent to below 122.5 yen .
Higher-yielding currencies tumbled, with the Australian dollar trading 2.6 percent lower at US$0.6523 .
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The euro came under pressure despite a better-than-expected reading in a key German indicator survey, weighed down by steep losses in crude oil and U.S. stocks.
"For the currency market, the decline in oil prices is bullish for the U.S. dollar and Japanese yen, but bearish for the euro,'' said Kathy Lien, director of currency research at GFT Forex in New York. "Since the beginning of the year, there has been a 70 percent positive correlation between the euro/dollar and the price of oil.''
In other trading, sterling was battered as it fell to its lowest in 12 years on a trade-weighted basis and hit a record low against the euro on concerns that the UK economy will suffer even more than the euro zone economy.
The euro hit a record high against sterling of 82.14 pence , according to Reuters data while the pound fell 1.3 percent against the dollar to $1.5412 .
Also on Tuesday, Russia's central bank let the ruble weaken against a euro/dollar basket beyond the 30.41 level it has defended in recent months, spurring speculation of further gradual depreciation.