Renewed talk of an early cutback in the U.S. Federal Reserve's stimulus sent the dollar back above 100 yen on Thursday while driving government bonds yields higher and world shares lower.
Surprisingly weak data from China and the euro zone added to the downbeat tone, outweighing confirmation by the Bank of Japan that its massive stimulus will continue and signals that the European Central Bank was considering easing its policy further.
Minutes of the last Fed policy meeting released on Wednesday showed officials felt they could begin scaling back the bank's massive bond purchase program at one of their next few meetings if economic conditions warranted it.
Many in the markets took that to mean the program could be trimmed earlier than consensus forecasts, which had been pointing to March.
"I think December is now more likely (for Fed tapering) than was previously the case," said Simon Smith, chief economist at FXPro, adding this was largely due to the Fed having made clear tapering did not necessarily mean rate hikes would follow.
That shift in perceptions caused a big spike in U.S. bonds yields, boosting demand for the dollar which hit a four-month high of 100.83 yen, up 0.8 percent on the day.
German 10-year bond yields rose 6 basis points to 1.77 percent, tracking the rise in U.S. Treasury note yields, which reached 2.8 percent on Wednesday.
The dollar gains and prospects that the flow of Fed dollars could soon slow also had a major impact on gold, which saw its biggest drop in seven weeks on Wednesday to settle near $1,249 an ounce.
Share markets - which have recovered to pre-financial crisis levels this year largely thanks to the loose monetary policies adopted by the Fed and other major central banks - lost ground broadly.
An exception was Japan, where the Nikkei index rose as exporters gained from the weaker yen .N225.
MSCI's global benchmark index .MIWD00000PUS, which tracks price moves across 45 countries, shed 0.4 percent, putting it on course for its biggest weekly loss since August.
"Having got hooked on both indefinite QE and low interest rates, investors are becoming increasingly restless and inclined to taking profits," said Alastair Winter, chief economist at Daniel Stewart.
But some analysts said the Fed minutes, from a meeting held there weeks ago, had not settled the debate over the central bank's next move, which could limit further moves in prices of riskier assets.
"Our house view is that there is 25 percent chance in December, 25 percent in January and 50 percent in March," Nick Xanders, who heads up European equity strategy at BTIG said.
Europe's broadest share index, the FTSEurofirst 300 .FTEU3, was down 0.4 percent with banks .SX7P, which are most acutely exposed to the benefits offered by monetary stimulus, among the biggest fallers.
Mining stocks .SXPP dropped further still, shedding 1 percent as the sector took an added hit from data showing activity in China's vast factory sector grew at a slower pace than expected in November.
Unexpectedly weak surveys of business activity in France and the whole 17-nation euro area piled on the gloom, though these were partially offset by data showing Germany's manufacturing and services sectors performed better than forecast. ECONEZ
"Output, outside France and Germany, did rise for the fourth month in a row, suggesting the region is returning to growth - but the concern is that the rate of increase we saw in November did slide to the weakest we've seen in those four months," said Chris Williamson, chief economist at survey compiler Markit.
OIL MARKET EYES IRAN
In the oil market, uncertainty over whether world powers will be able to strike a deal with Iran over its nuclear program added to the concerns about an early Fed tapering, sending Brent crude futures below $108 a barrel
"The issue of tapering is back to the fore after yesterday's Fed minutes," said Victor Shum, vice-president of energy consultancy IHS Energy Insight. "Talks between Iran and world powers are erasing some geopolitical risk, but the situation in Libya is putting a floor under prices."
Brent crude fell 12 cents to $107.94 a barrel by 0915 GMT, while U.S. oil shed 17 cents to $93.62