Asian markets sank Monday and the dollar rallied after Fed boss Jerome Powell warned of more interest rate hikes to fight inflation and poured cold water on the prospects of a cut in the new year.
The hefty selling tracked a painful day on Wall Street, where all three main indexes tanked between three and four percent as investors contemplated an extended period of monetary tightening.
In a much-anticipated speech to global finance chiefs Friday, Federal Reserve Chair Powell said his priority was bringing inflation down from four-decade highs, even at the expense of economic growth, adding that failure to act now would cause more pain later.
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," he told the symposium at Jackson Hole, Wyoming.
The comments dealt a blow to markets, which had in recent weeks enjoyed a bounce from June lows as weak economic data and a slowdown in price rises fanned hopes the Fed would temper its interest rate hike drive.
Analysts said the chances of a third successive 75 basis-point increase next month had risen, with US Treasury yields -- a gauge of future interest rates -- surging.
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"The game of assessing the Fed outlook has shifted from guessing how high the peak rate might be to also understanding how long it might stay there for," Yanxi Tan, of Malayan Banking, said.
In Asian trade, investors ran for the hills as they contemplated an era of high borrowing costs with Charles Schwab & Co's Liz Ann Sonders saying that once the Fed gets to "whatever the final hike is, they're going to stay there for a while".
"The market had trouble digesting that," she told Bloomberg Television.
Tokyo, Sydney, Seoul and Taipei all fell more than two percent. Hong Kong, Shanghai, Singapore, Jakarta and Wellington were also well down.
The dollar jumped against its major peers, closing in on the 140 yen mark not seen since 1998, while an energy crisis in Europe kept the euro depressed.
Still, oil prices extended gains as talk that surging interest rates could choke off the economic recovery was not enough to offset supply concerns.
The commodity has fallen in recent weeks on bets that demand will be hit by an expected drop in economic output, particularly from China as it continues to battle a Covid outbreak with lockdowns.
But fresh unrest in Libya, warnings that an Iran nuclear deal was not imminent and a possible OPEC output cut kept prices elevated.
Key figures at around 0230 GMT
Tokyo - Nikkei 225: DOWN 2.8 percent at 27,851.68 (break)
Hong Kong - Hang Seng Index: DOWN 0.9 percent at 19,989.39
Shanghai - Composite: DOWN 0.6 percent at 3,217.78
Dollar/yen: UP at 138.53 yen from 137.38 yen Friday
Euro/dollar: DOWN at $0.9931 from $0.9964
Pound/dollar: DOWN at $1.1672 from $1.1743
Euro/pound: UP at 85.07 pence from 84.85 pence
West Texas Intermediate: UP 1.1 percent at $94.05 per barrel
Brent North Sea crude: UP 0.8percent at $101.79
New York - Dow: DOWN 3.0 percent at 32,283.4 points (close)
London - FTSE 100: DOWN 0.7 percent at 7,427.31 (close)