While the Federal Reserve raised interest rates for the fourth time in a year and officials signaled they may hike three more times by early 2020, bond markets marked increased expectations the U.S. economy may be running out of steam.
The U.S. bond yield curve -- a widely considered indicator of future recessions -- flattened to 10 basis points and just a shade above a 11-year low set earlier this month with an inversion widely considered as a harbinger of recession.
Further fueling growth concerns was a view that favorable investment flows such as repatriation investments from U.S. companies was slowing substantially.
"The Fed seems to be suggesting there is more risk to their reaction function than to remain on auto-pilot on interest rates for next year with flow trends also acting as a headwind for the greenback," said Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch in London.
Repatriation flows peaked at nearly $300 billion in the first quarter of 2018 but has shrunk to nearly a third at $93 billion in the September quarter according to latest U.S. data.
The dollar fell 0.88 percent against its rivals to 96.18 as of 2:10 p.m. ET, its lowest level in a month. On a daily basis, it is set for the biggest percentage drop in six weeks.
A rate hike by the Riksbank was not a consensus view in the foreign exchange markets, with a Reuters poll showing two thirds of analysts expected the Riksbank to keep rates unchanged. The remainder predicted a tightening.
Sweden's decision to raise interest rates also fueled expectations that other major central banks will also hike policy rates next year with the Bank of England and the European Central Bank emerging as the most likely candidates.
"Along with the usual year-end thin market trading problems, we are seeing some messy markets in currencies this morning and the dollar is struggling as a result of that," said Alvin Tan, a currency strategist at Societe Generale in London.
Indeed, while the Fed's 'dot plots' now signal two, instead of three, rate hikes for next year, the market is unconvinced and is barely pricing in one increase in a reflection of heightened market concerns of the state of the global economy.
The euro rose 0.93 percent to $1.1481 building on gains on Wednesday on news that Italy had struck a deal with the European Commission over its contested 2019 budget and some solid trade data this week.
The Japanese yen advanced 1.48 percent, changing hands at 110.81 on the dollar and poised for fifth straight day of gains. In a widely expected decision, the Bank of Japan kept rates steady, maintaining its ultra-loose monetary settings.
Sterling gained 0.5 percent to $1.2668.
The Bank of England is due to hold its final policy meeting of the year on Thursday, where markets expect the central bank to stay on hold.
While the Fed raised interest rates by a quarter point, China's central bank rolled out a policy tool to spur lending to small and private firms in a move that some analysts termed as equivalent to a targeted rate cut.