Bloomberg News reported that officials reviewing China's foreign-exchange holdings have recommended slowing or halting purchases of US Treasuries, citing people familiar with the matter.
The dollar tumbled against the euro, which shot up above $1.20, and against the yen.
"If the reports turn out to be true and China no longer sees Treasuries as an attractive option, the repercussions could be significant as the country is one of the biggest holders of US debt," said Craig Erlam, senior market analyst at currency trading firm OANDA.
Fewer Chinese purchases of US bonds would likely see interest rates paid to attract buyers climb higher, and thus the US Federal Reserve would have less need to hike rights.
"The tightening effect of such measures would likely have an impact on how many times the Federal Reserve raises interest rates this year, which is why we've seen a corresponding drop in the dollar," said Erlam.
Wall Street stocks, after closing at record highs on Tuesday, fell at the open. The Dow shed 0.3 percent in the first minute of trading.
Meanwhile in Europe, London's benchmark FTSE 100 index hit a record intra-day high of 7,756.11 points. Later around 1330 GMT, it was up 0.1 percent at 7,741.11.
In the eurozone, Frankfurt's DAX 30 dropped 1.0 percent and the Paris CAC 40 shed 0.4 percent.
Elsewhere, a rally across Asia that welcomed in 2018 looked to have run out of steam with most markets slipping into the red on profit-taking, but Hong Kong rose for a 12th day as share prices in energy groups climbed against a backdrop of firming oil prices.
Hong Kong's main stocks index is now less than 900 points off its record high of 31,958.41 hit in October 2007.
Shanghai finished up 0.2 percent, a ninth straight advance, but Tokyo ended 0.3 percent down.
- Firm oil prices -
Despite the losses on broader markets, energy firms stood out as oil mostly pushed higher.
Crude has more than doubled from its lows below $30 in early 2016, supported by an output freeze deal between OPEC and Russia and, recently, tensions in the oil-rich Middle East.
Market-watchers say unrest in key producer Iran could dent the country's capacity, while others point out that any suppression of protests by Tehran could also lead Trump to reimpose export sanctions.
Oil futures have won support this week also from data showing a huge drop in US stockpiles as a big freeze in the northeast of the country fans demand for heating fuel.