The dollar index rose to its strongest since 2002 on Monday, extending its rates- and risk-off driven rally since last week's CPI report showed U.S. inflation at a new 40-year high, pushing 2-year and 10-year Treasury yields to their highest since 2007 and 2011 and riskier assets into a global tumble.
Only the haven yen managed a modest gain against the dollar after USD/JPY briefly reached its strongest since 1998.
With euro zone inflation at a record 8.1% high in May and UK inflation at 9%, markets fear a wave of central bank tightening, leading to asset deflation and recession risks.
Futures markets foresee the Fed raising rates by at least 50bp at each of its next four meetings starting Wednesday, a total of 260bps by year-end and terminal fed funds reaching 4% next year.
The ECB is seen hiking 25bp in July -- with 50bps moves in September, October and December now favored -- 167bps by year-end and topping out just shy of 3% next year.
BOE is priced for another 188bp of rate hikes by year-end and a terminal rate near 2.6%.
In contrast, only 3bp of tightening by year-end is priced for the BOJ, despite soaring import costs nL1N2Y003C.
With core-core inflation only at 0.8%, the BOJ will be very cautious about tightening.
Friday's University of Michigan consumer sentiment data highlighted increasing inflation anxiety nAQN15DE82 and Monday's New York Fed survey also saw inflation expectations rise, though coupled with labor market optimismnL1N2Y0167.
Those reports suggest the Fed will err on the side of 50bp rate hikes until inflation clearly begins to trend lower.
Wednesday's Fed will be watched for rates and economic forecasts, particularly inflation.
EUR/USD fell 0.8%, with its 1.0418 EBS low its lowest since May 16 and close to May's 1.0349 low and 2017's 1.0340 trough.
Bund-BTP 10-year yield spreads hit three-year highs, adding to concerns about euro zone fragmentation and potential ECB options to address it while also raising rates nL1N2Y013L.
USD/JPY fell 0.15% after its early 135.22 EBS peak just above 2002's 135.20 high and highest price since 1998, before then falling to 133.595 on broad haven yen buying amid the global exodus from riskier assets.
But the roughly 40bp surge in 2-year Treasury-JGB yield spreads to 3.28% and the highest since 2007 makes fighting the uptrend risky until Fed rate hike expectations crest.
Sterling was down 1.4%, with its 1.2124 low the lowest since May 2020.
Weak UK GDP data and the government setting out plans on Monday to override some of the post-Brexit trade rules for Northern Ireland nL1N2Y00BF added to the risk-sensitive pound's woes.
Asia risk proxy Aussie slid 1.6%, amid worries a global slowdown will weaken demand for commodities.
USD/CNH climbed 0.59% on new concerns about the viability of China's zero-COVID policy nL1N2Y00DU.
Emerging market currencies were beaten up, but not as much as bitcoin and ether, both with double-digit percentage losses.
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