Concerns that US President Donald Trump's reform agenda could be slowed down, and that Trump himself could even face the threat of impeachment, added to disappointing US economic data on Wednesday to hit the dollar and spur a pullback from richly valued stocks.
Reports that Trump asked then-FBI Director James Comey to end a probe into his former national security adviser have raised questions over whether obstruction of justice charges could be laid against the president.
This follows a week of turmoil at the White House after Trump fired Comey and then discussed sensitive national security information about Islamic State with Russian Foreign Minister Sergei Lavrov.
So far, broadly upbeat global growth has underpinned risky assets and supported the multi-year lows in measures of market volatility.
But the retreat in the dollar, which has now given up all the gains it made following Trump's presidential election win in November, and a pull-back from record highs for world stocks points to investor unease about this week's headlines.
“The Trump issue seems to come in waves, and now we have another wave,” said Hans Peterson, global head of asset allocation, at SEB Investments.
“I have been asked if he is going to be impeached. I think that is the type of discussion some (investors) are having," Peterson said, pointing out that institutional clients are turning cautious.
US stock futures were off 0.5 per cent, though they were still close to record highs.
At nearly 18 times forward earnings, the S&P 500 trades at a significant premium to its long-term average valuations of 15 times, according to Thomson Reuters data.
More attractively valued European stocks slipped slightly, although the region's brighter economic outlook and better-than-expected corporate profits continue to draw investors.
Upbeat growth prospects and signs of stronger integration also spurred flows into regional bond markets, narrowing the gap between US and German government borrowing costs to its tightest level in over six months.
This has started to partly reverse a trend that began during the euro zone debt crisis of 2011/2012, where the single currency bloc and the United States' economic paths appeared to diverge.
This reversal was also evident in currency markets, with the euro climbing to its highest since November 7 - just before the US presidential election - against the dollar.
Recent US data, which includes softer-than-expected retail sales and inflation, has raised concern about the strength of consumer sentiment.
Meanwhile, the euro zone economy started the year with robust growth that outstripped that of the United States and set the stage for a strong 2017.
“At the moment everyone is focusing on the political relief in Europe and the political unrest in the US,” ING's senior rates strategist Martin van Vliet said.
In commodity markets, safe-haven gold hit a two-week high, climbing 0.6 per cent to $1,243.31. The precious metal has risen for five straight days.
Data showing an increase in US crude investors hit oil prices as concerns about oversupply despite efforts by top producers Saudi Arabia and Russia to extend output cuts once again weighed.
Brent crude fell 0.3 per cent to $51.53 a barrel, while US West Texas Intermediate (WTI) crude slipped 0.6 per cent.