[LONDON] The dollar hit multi-year highs against the euro and yen and emerging markets were under mounting pressure on Tuesday, as the prospect of the first rise in US interest rates in almost a decade stoked global volatility.
The skittish mood spread from Asia into Europe where stocks fell a second day despite the European Central Bank's new bond buying campaign continuing to push down the euro and the bloc's already record-low borrowing costs.
Driving up the dollar was speculation that the Federal Reserve will start lifting interest rates from mid-year after another stellar set jobs data on Friday and a subsequent chorus of hawkish Fed policymaker comments.
The euro's rapid melt lower was compounded by worries about Greece as euro zone finance ministers prepared to meet in Brussels, a day after the head of the group, Jeroen Dijsselbloem, had urged Athens to "stop wasting time" and start reforms.
Selling in the euro had gathered pace again in Europe as a break below a major layer of chart support at US$1.0762 to US$1.0735 left bears eyeing US$1.07 the figure and some mulling parity. Britain's pound was also piling on the pressure. It topped 1.40 euros for the first time since late 2007.
The dollar had broken higher on the yen in Asia to reach 122.02, territory not visited since July 2007. "It is all about the Fed now," said Aurelija Augulyte senior FX strategist at Nordea in Helsinki.
"The ECB (bond buying) bias has now been fully digested, but what the market is now trying to do is price in earlier Fed rate hikes." The prospect of rising US yields threatened to draw funds away from emerging markets, causing strains from Brazil to Turkey. The Brazilian real led the rout, having fallen for the sixth straight session.
The pressure then spread through Asia and Africa with the South Korean won hitting its lowest since late August 2013, the Singapore dollar since 2010 and South Africa's rand in 13 years.
Eastern Europe was also heavily in the red. Selling accelerated for Poland's zloty, the Czech crown, Romania's leu and Hungary's forint while MSCI's main emerging market stock index fell for its eighth day running.
"At times like these it is really the currency moves, nobody really cares about the carry anymore," said Jeffries emerging markets strategist Richard Segal.
The volatility in currencies overshadowed data from China that showed consumer prices rose 1.4 per cent in February compared with the same month last year, although much of the increase was due to seasonal volatility in food prices.
Producer prices continued to slide, underscoring deepening weakness in the economy and intensifying pressure on Beijing policymakers to find new ways to support growth.
Shanghai shares eased 0.5 per cent, though that only unwound a little of Monday's gains. Japan's Nikkei also fell 0.7 per cent as the normal uplift of the weaker yen failed to materialise.
Wall Street was expected to fall again when trading resumes with job vacancy data and retail sales figures expected to support signs of a strengthening of the US economy.
Most commodities continued to struggle with the strength of the US dollar. Gold hit a three-month low around US$1,160 an ounce while copper futures shed almost 2 per cent.
Oil buckled in Europe after a valiant fight overnight. Brent crude fell 70 cents to a two-week low of US$57.86 a barrel, while US crude dropped back below US$50 a barrel to US$49.60.
Analysts said there was a risk of further falls particularly in Brent. Traders are still holding 'long' positions and the fundamental picture remains soft with little sign of any meaningful drop in production.
Libya is expected to up its exports to more than 2 million barrels of crude from two of its ports this week after disruptions due to fighting involving Islamic militants.
At the same time, global refinery maintenance is about to peak, which once it falls will bring more oil back online.