The euro surged to $1.2470 around 2100 GMT, up from $1.2342 at the same time Monday. Earlier the European currency hit $1.2488, a seven-week high.
The euro also rose against the Japanese currency, to 98.84 yen from 97.97 yen Monday.
The dollar slipped to 79.27 yen from 79.35 yen.
Analysts said that optimism was settling in over Europe's attempts to address the eurozone debt crisis, encouraging investors to pull away from the safe-haven dollar.
"Investors the world over are coming to terms with the European Central Bank's reported plan to put a cap on sovereign bond yields for struggling nations of the eurozone," said Neil Gilbert, an analyst at FX360.
"I say 'reported plan' because nothing has been confirmed at this point by anyone of power within the ECB."
Gilbert noted that Jorg Asmussen, Germany's own ECB member who also happens to be German Chancellor Angela Merkel's appointee, had voiced some support for the plan.
"The verbal support of the direct link to Germany has given investors the confidence that Germany is behind the plan and will not do anything to strike it down. However, the only thing that is creating the quiet confidence in the market at the moment is just a rumor," he added.
The dollar fell against the Swiss currency, to 0.9628 francs from 0.9729 late Monday.
The British pound rose to $1.5786 from $1.5703.
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