Weak manufacturing data from Spain, France, Italy, and Germany, sent the euro 1.1 percent lower, on pace for its worst day against the US dollar in more than six months.

"Data out of the euro area this morning was generally on the softer side," said Eric Viloria, FX strategist at Credit Agricole in New York.

Factory activity weakened across much of Europe and Asia in December as the US-China trade war and a slowdown in demand hit production in many economies, offering little reason for optimism as the new year began.

The lacklustre data and a broadly stronger US dollar exerted pressure on the single currency, Viloria said.

Sterling fell 1.2 percent, reversing gains notched earlier this week, as strong factory surveys failed to dispel growing concerns over Brexit negotiations.

While the dollar was relatively stable going into the end of 2018, a flagging equity market boom, waning cash repatriation by US companies, and the possibility that the US Federal Reserve will not raise interest rates as many times as it previously signalled now pose challenges for the greenback.

In a cautious start to the year, traders punished perceived riskier currencies such as the Australian dollar and the euro, while boosting the yen to a fresh seven-month high versus the dollar.

Against the yen, which tends to benefit during geopolitical or financial stress as Japan is the world's biggest creditor nation, the dollar was 0.36 percent lower.

China's factory activity contracted for the first time in 19 months in December as domestic and export orders continued to weaken, a private survey showed.

The Australian dollar, whose fortunes largely depend on the Chinese economy to which Australia sends a bulk of its commodities, fell 0.8 percent.

"The data out of China that contributed to the general concern of slowing global growth and this risk-off tone has been helping the Japanese yen display this outperform today," said Viloria.

The yen also found support from continued worries about an extended US government shutdown, he said.

President Donald Trump said his homeland security officials will make a plea to congressional leaders for a border wall on Wednesday and indicated he would not drop his demand for $5 billion in wall funding that triggered a partial government shutdown now in its 12th day.

Meanwhile, the benchmark 10-year US government bond hit an 11-month low on Wednesday, further supporting the Japanese yen.