The has taken a beating in the aftermath of last week's much softer-than-anticipated non-farm payrolls report, dealing a blow to those betting on a stellar year for the greenback.
A dollar sell-off that began on Friday after news that the U.S. economy created 74,000 new jobs last month versus expectations for a 200,000 gain extended into Monday, with the greenback tumbling to one-month lows against the Japanese yen and Australian dollar.
China's yuan meanwhile hit a record high at 6.0415 per dollar on Tuesday.
"Certainly, it [the dollar move] is a very grave challenge for the dollar bulls," said Sean Callow, senior currency strategist at Westpac Bank in Sydney.
(Read more: Traders eye retail sales data, earnings as volatility jumps)
"It's a definite worry if you're bullish on the dollar because there's been no shortage of economists coming out to explain that the December payrolls report was impacted by special factors and could be reversed next month," Callow said. "They could be right, yet the money is not being placed to back that call."
Up until Friday's data, upbeat economic news and expectations for a scaling back of the Federal Reserve's monetary stimulus had sparked broad-based gains in the U.S. currency.
Take a look at the latest positioning data in the foreign exchange market. Currency speculators lifted their bets in favor of the dollar in the week to January 7 (before Friday's jobs data) to their largest amount in four months, data from the Commodity Futures Trading Commission on Friday showed.
(Read more: Job growth weak, raising questions about Fed move)
The value of long-net positions on the dollar effectively bets on the greenback rising, standing at $21.11 billion compared with $17.5 billion in the week before.
It now appears that those bets are being rapidly unwound as investors reassess the outlook for the U.S. economy and monetary policy.
"Disappointing NFP [non-farm payrolls] on Friday will probably dull dollar bulls for now as aggressive bets for hastened "taper" have taken a backseat while fresh economic evidence is watched," Mizuho Corporate Bank said in a note Monday.
The dollar index, which measures the greenback's value against other major currencies, traded at about 80.61 on Tuesday. That's down almost 1 percent from a seven-week peak hit last week.
In its 'Client FX Flow Monitor' released on Tuesday, Credit Agricole said that asset managers favored selling the dollar.
"This may be related to more unstable risk sentiment to the detriment of interest in buying U.S. stocks. Going forward, we expect such flows to reverse on the back of stabilizing U.S. growth expectations," the report said.
(Read more: US stocks starting off 2014 in correction mode)
Callow said that although many investors would see the pull-back in the dollar as a buying opportunity, Westpac was taking a more bearish approach.
"We're starting the year with a below consensus forecast on the U.S. economy, which we think will be lucky to get to 2 percent growth this year," he said. "That's one reason why our base case is for dollar/yen to move to 99-100 yen later in the year, which is in sharp contrast to most."
A move to 100 yen would imply a fall of just over 3 percent from current dollar/yen levels around 103.34.
— By CNBC.Com's Dhara Ranasinghe; @DharaCNBC