The dollar lost about one percent against the Swiss franc at one stage on Monday and fell versus the euro and yen after warnings of possible al Qaeda attacks prompted investors to move their cash into safe-haven assets.
Over the weekend, intelligence warnings of al Qaeda threats to attack the New York Stock Exchange, World Bank and International Monetary Fund prompted the United States to issue a "high" level of alert for financial institutions in New York and Washington.
The Swiss franc, a traditional refuge in times of geopolitical uncertainty, was the biggest gainer on the day.
Some analysts also said the dollar's security-driven losses were accelerated by continuing gains in oil prices.
"The terror warning is a negative for the dollar given the US is seen as a target and the dollar is seen as the currency most vulnerable to geopolitical risks," said Shahab Jalinoos, chief currency strategist at ABN Amro in London.
"The US economic recovery is still seen as fragile. It has yet to prove it is self-sustaining so anything that knocks it off balance would be seen as negative for the currency."
The dollar slipped from last week's six-week high against the euro and two-month peak against the yen to stand at 111.08 yen and $1.2062 per euro by 1150 GMT, down about a third of a percent on the day but off the session's lows.
The dollar fell to 1.2690 Swiss francs but recovered to 1.2727 by 1150 GMT when US investors joined the market.
"It's early New Yorkers coming in and seeing what Europe has done with it given the terror warnings. The market still wants to see where the dollar rally can go," said one trader at a UK bank.
In late July, the dollar rose sharply after Federal Reserve chairman Alan Greenspan fanned optimism about the US economy.
European and US government bonds also benefited from safe-haven flows with US Treasury yields hitting two-week lows, while stocks fell.
The euro was also buoyed by news manufacturers in the euro zone increased production in July at the fastest pace in nearly four years. The Reuters Eurozone Purchasing Managers' Index rose to 54.7 from 54.4 in June, matching May's 43-month high.