The US dollar has hit a 16-month high and bond and stock markets have drooped after the strongest US inflation reading in over three decades fuelled expectations of Fed interest rate hikes next year.
The dollar index, which gauges the currency against six peers including the yen and euro, continued to make steady progress in early European trading after rising on Wednesday in its biggest jump since March.
US consumer price data released on Wednesday showed the biggest gain in four months, lifting the annual increase to 6.2 per cent, the strongest year-on-year rise since November 1990 and following a 5.4 per cent leap in September.
The dollar pushed the euro below $1.15, leaving the next major chart support level down at $1.12. European stocks nudged higher, sensing a competitiveness boost, but the yen was falling towards a four-year low at 114.15 per dollar.
"There wasn't a single element of the CPI data that drove the upside surprise yesterday, it was just everywhere," said Societe Generale FX strategist Kit Juckes.
"You can't ignore something that broad-based and it will reinforce the view that the Fed is going to hike next year."
After selling off sharply together with US Treasuries after the US inflation numbers, euro zone bonds were calmer in early trade. US bond markets were closed for a holiday.
Still, 10-year bond yields were around two basis points higher across Europe,, firmly above lows hit in the past week as central banks including the ECB talked down aggressive market pricing on rates.
US Treasury yields leapt by the most since February on Wednesday to nearly 1.6 per cent. US real yields, which take inflation into account, dipped to record lows and the five-year breakeven rates hit a record 3.113 per cent.
"The inflation numbers surprised on the upside, and they may not even be the peak," said ING economist Rob Carnell.
"The market thinks the Fed, and most other central banks, are behind the curve," meaning a more rapid tightening than policy makers have so far communicated, he said. "Risk assets hate this."
China and Japan's stock markets also rose overnight, supported by property developer China Evergrande Group making another last-minute bond coupon payment to avoid default and by a weaker yen, which helps Japanese exporters.
Chinese blue chips rallied 1.28 per cent, led by real estate stocks. Japan's Nikkei ended up 0.6 per cent as the yen weakened as far as 114.15 per dollar from as strong as 112.73 earlier this week.
US stock futures ticked up 0.1 per cent. On Wednesday, the S&P 500 fell d 0.8 per cent, its worst day in over a month.
The Fed has said prices will fall once supply bottlenecks start easing and last week urged patience, reiterating that high inflation is "expected to be transitory".
The money market now prices a first Fed interest rate increase by July.
Volatility spilled into other markets, with the CBOE Volatility index, Wall Street's so-called fear gauge, touching its highest level in nearly a month.
Investors sought inflation hedges, with gold jumping to a five-month high of $1,868.20 overnight before easing to around $1,850 on Thursday.
The main energy commodities have also been driving up inflation. Oil steadied in London after pulling back sharply from near seven-year highs the previous day, when US President Joe Biden said his administration was looking for ways to reduce energy costs.
Brent crude futures rose 64 cents to $83.27 a barrel, but down from as high as $85.50 on Wednesday and October's three-year peak of $86.70.
US West Texas Intermediate (WTI) crude gained 60 cents to $81.98 per barrel, but off the overnight high of $84.97 and last month's seven-year peak.
Bitcoin hit a fresh record at $69,000 before dipping back to around $64,700.