The dollar fell more than 1 percent against the euro on Tuesday, stung by the discovery of poison in a US Senate office building.
The US currency was also under broad pressure ahead of this week's Group of Seven industrial nations meeting in Florida, and failed to lift far above a three-year low against the yen even after suspected Japanese intervention.
Dealers in the US said news the poison ricin was found in US Senate mail punished the dollar, recalling worries about attacks on US soil which dogged it after September 11, 2001.
"That news about ricin put the dollar back into risk aversion mode very quickly" and under pressure, said Tim Mazanec, senior currency strategist with Investors Bank & Trust in Boston.
US Treasury Secretary John Snow's scheduled testimony to the Senate Finance Committee on President George W. Bush's 2005 budget proposals was postponed but his appearance before a House Ways and Means Committee on the budget, scheduled for 2:00 pm EST (1900 GMT) on Tuesday, was expected to proceed.
As foreign exchange traders intensified their focus on the looming G7 finance ministers meeting in Boca Raton, Florida, US Treasury Under-secretary John Taylor speaking late on Monday fanned the view that G7 ministers would offer the greenback little help when they meet on Friday and Saturday.
The dollar lost more than 1 percent against the Swiss franc, sterling and the Australian dollar as selling snowballed after Taylor said that while he expected some discussion on currencies, growth would be the center-piece of the gathering.
"The dollar negative sentiment really started to pick up yesterday on comments about what may or may not be included in the G7 statement," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein.
"There has been a reassessment about the impact the G7 may have."
Earlier in the global day, the dollar, after hitting a new three-year low of 105.25 yen, jumped more than half a yen to around 105.80 yen amid suspected, but unconfirmed, Japanese intervention.
Midmorning in New York, against the yen the dollar was trading at 105.49 yen, nearly flat on the day.
The euro was at $1.2563 according to Reuters data, up about 1.1 percent on the day but off session highs of $1.2599. The euro hit a record peak just below $1.29 in January.
Against the Swiss franc, the dollar was down 1.1 percent on the day to 1.2474 francs.
Sterling was up about 1.1 percent to $1.8400.
The market is waiting to see if G7 ministers address the dollar's broad two-year decline, although many doubt that they have a common position and question whether a September G7 statement calling for currency flexibility will be altered significantly.
Japanese Finance Minister Sadakazu Tanigaki echoed Taylor, saying on Tuesday that macroeconomic and structural issues would have most weight in the talks, although he added: "The issue of foreign exchange will not be neglected by the G7."
"Dollar/yen continues to be more of the same story. The market just wants (the dollar) to go lower and it's just a matter of when we might see (yen-weakening) intervention and how strong it is going to be," said John Beerling, regional foreign exchange trading desk manager for Wells Fargo in Minneapolis.
The dollar has been creeping lower and lower against the yen in the past couple of sessions as the market has tested Japan's determination to prop it up ahead of the G7 meeting.
There was no confirmation that the Bank of Japan had sold yen for dollars in the European session but dealers said the price action was in keeping with previous bouts of suspected intervention.
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