The dollar and US stocks fell sharply on Wednesday, pressured by mounting concerns of political turmoil after reports that Donald Trump had asked former FBI Director James Comey to end an investigation into Michael Flynn.

The New York Times reported on Tuesday that the President had asked Mr Comey to terminate the investigation into the former National Security Adviser during an Oval Office visit back in February.

"I hope you can see your way clear to letting this go, to letting Flynn go," the President said to Mr Comey during that meeting, according to the memo. "He is a good guy. I hope you can let this go."

The reports sparked speculation that obstruction of justice charges might be laid against Mr Trump, which in turn weakened confidence in the President’s power to implement some of the aggressive stimulus measures he has been championing.

The prospect of tax cuts and regulatory rollback have been propping up stocks and the dollar since late last year.

The dollar was more than 1 per cent lower against Japan's yen late on Wednesday afternoon in London. The yen, like the Swiss franc and gold, is generally considered a safe haven asset during times of political volatility.

Stock markets in the US slid sharply too, with the S&P 500 and the Dow Jones Industrial reportedly suffering their biggest falls since last year in early morning trading before recovering slightly.

“Markets have shifted from the 'USD euphoria' that was the main theme immediately after Mr Trump’s victory to a more sober valuation of the effective ability of the US administration to implement its policy agenda and its goals,” strategists at UniCredit wrote in a note.

Strategists at Morgan Stanley agreed.

"Markets are concerned that these events may slow down the administration's reform agenda," they wrote in a note.