Greece's financial crisis and signs of growing opposition to austerity in Spain sent the euro to its lowest level in a month on Tuesday, while shares and commodities took a knock as the dollar powered higher.
Europe's main markets returned to action after a long weekend with the mood unsettled by Sunday's strong local election showing by anti-austerity parties in Spain, while bets were put back on a U.S. rate hike this year after having been all but canceled over the past two months.
Europe's stock markets fell between 0.5-1.3 percent <0#.INDEXE> as early resistance gave way and a fall by the euro back below $1.09 mirrored signs that contagion from the region's debt problems was creeping back into bond markets.
A flight into traditional safe-havens saw Switzerland's 10-year bond yields CH10YT=TWEB drop into negative territory for the first time this month as Spanish ES10YT=TWEB, Portuguese and Greek bonds saw fresh selling. [GVD/EUR]
The biggest global currency, the dollar, was another beneficiary as it continued its strong run following Friday's robust inflation data and comments from Federal Reserve chief Janet Yellen.
"The outlook for Fed policy normalization is again gaining traction and certainly with Greek risk there is nothing that would dampen this trend," said Ulrich Leuchtmann head of FX strategy at Commerzbank in Frankfurt.
"There is good reason for continued dollar strength but if it goes too quickly we will see the same thing as happened in March and early April because there will be the question about what effect it will have (on the U.S. economy)."
ASIAN GAINS
The falls in Europe meant global shares MSCI's benchmark All World index .MIWD00000PUS saw their biggest fall in three weeks.
Overnight, Asian shares had reversed earlier losses to end 0.12 percent higher on the back of gains in Hong Kong .HSI, China .CSI300.SSEC and to a lesser degree, Tokyo.N225, which hit a 15-year high as the dollar sent the yen JPY= to an eight-year low.
Hong Kong's Hang Seng index jumped 1.3 percent, to near a seven-year high, on expectations of more money inflows from mainland China following Beijing's moves to expedite cross-border investment. China's main bourses hit seven-year highs.
In the currency market, the dollar's move to a one-month high against its currency basket extended a rally triggered by Friday's comments from Yellen that she expected the economy to strengthen.
Her Vice Chair Stanley Fischer added in a speech in Israel on Monday that too much importance was being placed on the central bank's first rate hike, and it would take a few years to get rates back to more normal levels.
Investors await the latest batch of U.S. data later on Tuesday that could provide more clues on the strength of economic recovery, including durable goods for May and consumer confidence for April. ECONUS
The dollar index .DXY was last up 1.1 percent on the day at 97.084 and still on the rise.
That put pressure on commodity markets. Gold XAU=, copper CMCU3 and most metals dipped while Brent oil slipped to $65.02 a barrel and U.S. crude CLc1 lost 0.7 percent to leave it at $59.31.
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