While you were sleeping: UPDATED Stocks, US dollar plunge on Trump turmoil

Stocks on Wall Street fell the most this year and US Treasury bonds rose as the political firestorm surrounding President Donald Trump fired fears he won't be able to deliver on his plans for tax and regulation cuts.

The US dollar also lost all of its gains since Mr Trump was elected as reports of a leaked memo by former FBI director James Comey suggested Mr Trump tried to obstruct a federal investigation, the most serious in a series of controversies.

"I think the biggest issue right now is what does this mean for the plan that we thought we were on,"Jeremy Bryan portfolio manager at Gradient Investments in Arden Hills, Minnesota, told Reuters. "Is it delayed or is it dead?"

At the close of trading in New York, the Dow Jones Industrial Average plunged 372.82 points, or 1.8%, to 20,606.93. The Nasdaq Composite Index slumped 2.6% from its all-time high to 6011.24 and the Standard & Poor's 500 Index shed 1.8% to 2357.03.

"We have an environment now where we don't speak about fiscal stimulus any more, we don't talk about corporate tax cuts any more," Commerzbank cross-asset strategist Max Kettner told Bloomberg.

The divergence between low volatility in the markets and high volatility in Washington "is unlikely to last very long," he added.

End of stability
Volatility returned to the market after weeks of stability. The S&P 500 has closed with a daily percentage change of 0.5% or less for 15 straight sessions, the longest such streak since February 1969.

The CBOE Volatility Index, a measure of expected swings in the S&P 500 over the next 30 days, rose more than 30%.

The ICE US Dollar Index, which measures the dollar against a basket of six currencies, fell 0.6% and was on track for its lowest close since before the election.

Investors piled into assets they perceive as havens, sending gold up 1.8% to $US1259.00 an ounce, and the yield on the benchmark 10-year Treasury note fell to 2.219% from 2.329% on Tuesday. 

Financial stocks in the S&P 500 were hardest hit with Bank of America and Morgan Stanley both falling 6%. 

"If [Trump] is preoccupied defending himself and if it goes a lot further, then any hope of his legislative agenda coming to the fore is going to be reduced," John Stopford, the London-based head of fixed-income at Investec Asset Management, told Bloomberg.

"Clearly at the margin it's a negative. At the moment there's a classic environment for yields to rally a bit further and for the [US] dollar to sell off."

Odds rise against rate increases
Investors are easing bets on Federal Reserve interest rate increases, too, as a result.

The odds that the central bank raises its benchmark rate next month are about 62%, based on the current effective fed funds rate and the forward overnight index swap rate; that's down from 80% a week ago, according to Bloomberg.

In the latest corporate earnings, shares of Target gained after the retailer posted better-than-expected quarterly earnings and offered an upbeat outlook.

The stock traded 1.9% higher at $US55.58 after rising as high as $US56.97 earlier in the day.

In Europe the Stoxx 600 Index finished the session with a decline of 1.2% from the previous close.

The UK's FTSE 100 Index fell 0.3%, Germany's DAX Index weakened 1.4%, while France's CAC40 Index slumped 1.6%.

(BusinessDesk)