The euro was also on the defensive against most currencies, hitting a 3-1/2-year low against sterling and a six-week trough versus the yen as investors fretted about the delay in mobilizing bailout funds for troubled euro zone states.
The common currency did reverse early losses against the dollar in the aftermath of the weak US retail sales number but investors cautioned it was not the start of a new rally.
Investors have temporarily shifted their focus to the US economy from euro zone debt concerns after Monday's weak US report and ahead of testimony by Fed Chairman Ben Bernanke on monetary policy this week.
US retail sales fell 0.5 percent last month, though economists had expected a gain of 0.2 percent. Ex-autos, sales dropped 0.4 percent.
"I think people have started to re-price more easing coming through from the Fed after the retail sales data," said Brian Kim, currency strategist at RBS Securities in Stamford, Connecticut.
In the absence of any other negative news from the euro zone, Kim added that market participants used negative US news as an excuse to pare back hefty short positions on the euro.
"We have moved quite a bit lower on the euro and there's a bit of fatigue setting in in terms of the euro downside. But overall, the euro still has a negative bias and it is still a sell on rallies."
In mid afternoon New York trading, the dollar slid 0.4 percent against the yen to 78.82 yen, adding to losses after the soft US retail sales data. The greenback fell as low as 78.67 yen, its weakest level since mid-June.
Investors could further sell the dollar if Bernanke hints in testimony on Tuesday and Wednesday at the possibility of more quantitative easing to boost the US economy.
The Fed last month expanded efforts to keep long-term interest rates low by saying it would buy an additional $267 billion in long-dated bonds while selling short-term securities. But it held off from a third round of outright bond purchases.
Hedge fund manager Stephen Jen at SLJ Macro Partners in London said he does not believe US economic numbers are weak enough to justify further quantitative easing from the Fed.
But he added that "the Fed could try to convey their easing bias by extending their commitment of low rates until mid-2015."
In mid-afternoon New York trade, the euro rose 0.1 percent against the dollar to $1.2259. It earlier fell as low as $1.2173, not far from a two-year low hit last week.
The euro also slid against sterling, to its lowest since late 2008, but was last at 78.46 pence, down 0.2 percent. The euro also dropped to 96.14 yen, its lowest since June 1, but last traded at 96.64 yen, down 0.4 percent.
The single currency further hit a record low against the Canadian dollar.
"The euro's losses were mainly a result of the uncertainty surrounding the bailout fund due to court issues. The implementation of that fund just keeps getting pushed back," said Greg Moore, currency strategist at TD Securities in Toronto.
Germany's Constitutional Court said on Monday it would not rule until Sept. 12 on whether the euro zone's bailout fund -- the European Stability Mechanism -- and planned changes to the region's budget rules are compatible with German law.
A report suggesting a change in the European Central Bank's stance on how some bondholders could be treated under Spain's bank bailout added to pressure on the common currency.
Investors have stepped up sales of the euro, disheartened by a lack of progress toward solving the bloc's spiraling fiscal crisis.
A report in the Wall Street Journal said ECB President Mario Draghi advocated imposing losses on holders of senior bonds issued by the worst-hit Spanish savings banks.
The ECB declined to comment on the report, which said finance ministers rejected the advice due to concerns financial markets would react badly to such a decision.