The euro hit $1.2112 in European trading - its lowest since it sank as far as $1.2029 in April 2006 - before pulling back up to $1.2169, still below the $1.2243 it bought a day earlier.
The European Central Bank said late Monday that although it estimates that potential loan write-downs for the continent's bank system will peak this year, "it is probable that loan losses will remain considerable in 2011 as well."
"This prospect, combined with continued market and supervisory authority pressure on banks to keep leverage under tight control, suggests that banking sector profitability is likely to remain moderate in the medium term," it added.
The euro has been battered recently by worries over Europe's debt crisis and its implications for future growth - underlined Friday by a rating downgrade for Spain, prompted by concern that the government's austerity measures will weigh on growth.
The dollar is a traditional safe haven for investors. Alongside Europe, China also was providing cause for concern on Tuesday, as a report showed manufacturing there slowed in May.
U.S. financial markets were closed Monday for Memorial Day and Britain had a bank holiday.
The British pound was higher Tuesday, rising to $1.4564 from $1.4472. The currency appears to have weathered the abrupt weekend resignation of a key Treasury official in the new coalition government.
The dollar slipped to 90.99 Japanese yen from 91.40 yen.
