The dollar rose to a new two-decade high on Thursday, as investors moved into the safe-haven currency because of concerns that tighter monetary policies to tame surging inflation will hurt the global economy.
Inflation had probably peaked, but the US consumer price growth slowed sharply in April, according to data released on Wednesday.
The data confirmed expectations for further hikes in interest rates by the Federal Reserve and investors worried that central bank tightening could slow global economic growth.
Asian stocks fell to a near two-year low, European shares fell and oil prices fell 2 per cent.
The dollar index, which measures the strength of the dollar against a basket of six currencies, rose 0.4 per cent to 104.44, its highest since December 2002.
The euro remained under pressure due to fears that the war in Ukraine and rising energy prices could lead to a recession later this year, despite increasing expectations of a hike in July.
The market was already priced for this, but now we can have a high level of confidence that the ECB will hike in July, according to strategists at MUFG.
After hitting its lowest since January 2017 at US $1.044, the euro fell 0.5 per cent to US $1.0463.
The risk sentiment soured further due to the news about China's COVID 19 situation, according to Mizuho strategists. Two new infections were reported in Shanghai, which reset the timeline for ending the lockdown. The city was combed for its last COVID 19 cases on Thursday to clear the way for an exit from a painful six-week lockdown. China's yuan fell as low as 6.8150 per dollar, its lowest since September 2020, and was last down 0.7 per cent at 6.8125.
The yen went up 1 per cent against the dollar, but was not far from its lowest level since April 2002 as hawkish Federal Reserve rhetoric continued to weigh on the Japanese currency.
A policymaker of the Bank of Japan said it was not appropriate to change monetary policy to control exchange rates, brushing aside from the idea of countering sharp yen falls with interest rate hikes.
The collapse of TerraUSD, a so-called stablecoin, underscored the strain on the criptocurrency market as it fell to its lowest in 16 months on Thursday.
The world's largest coin dropped 3 percent to US $27,584, after hitting its lowest since December 2020. It lost a third of its value in the last eight sessions.