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The US central bank's plans to scale back its money printing, combined with tighter financial conditions in China, lifted the dollar on Monday, but sent bonds, shares and commodities lower.
US stock futures pointed to Wall Street joining the falls, adding to the drop the major indexes have already suffered.
The declines stem from Federal Reserve's signal that the era of cheap central bank money - which saw many assets hit record highs - was coming to an end, but have been exacerbated by China's battle to transition to a lower growth economy.
Both events are unprecedented and have driven a sharp rise in risk aversion by investors fearing a long period of volatility across markets.
"The more liquidity you've got in the system, the more disorderly the potential could be, so that's the real fear about this," said Josh Raymond, market strategist for City Index.
The shift out of assets which have benefited most from cheap money has been sharpest in the US debt market, where yields on 10-year Treasury notes spiked to two-year highs of 2.6% on Monday.
This rise, and the brighter outlook for the US economy, which was behind the Fed's decision, has favoured the dollar against most major currencies. The dollar index was up 0.4% at 82.66 on Monday, building on last week's 2.2% rally, its biggest weekly gain in 19 months.
Against the yen, the dollar was up 0.1% at 97.97 yen while the euro fell 0.1% to $1.3105 after dropping as low as $1.3078, a level not seen since June 6.
STOCKS SHUNNED
As investors retreated into the dollar, share markets everywhere have tumbled, with the falls heaviest in many of the world's major emerging markets.
MSCI's benchmark index for stocks in the emerging world fell for a fifth straight day on Monday to touch one-year lows, led by China shares, which tumbled to their biggest daily loss in almost four years.
The rise in Treasury yields and better prospects for the US economy have undermined the attraction of emerging markets, as China's efforts to clean up its banking system and switch to a slower growth trajectory raises fears of greater instability.
"The China story is something that people are aware of and keeping an eye on, but broadly people are still digesting the comments of the Fed," RBS emerging markets analyst Mohammed Kazmi said.
MSCI's main world equity index, which tracks stocks in 45 countries, shed 0.8% to add to last week's 3.2% loss, its worst weekly fall since May 2012.
CHINA CRUNCH
The concerns over China's economic health spread to mining stocks in Europe, adding to worries about the impact of the Fed's tapering, and pushing the FTSEurofirst 300 index of top companies down 1.5% by midday to 1,124.10 points.
The Euro STOXX 50 Volatility index, known as the VSTOXX, jumped to a nine-month high, signalling a sharp rise in risk aversion among investors.
European equity markets weakened despite data showing German business morale picking up for a second straight month in June, pointing to a slow recovery for Europe's largest economy.
Commodity markets were faced with the additional pressure of the stronger dollar, which makes them more expensive to investors outside the US.
Copper dropped to its lowest price in 21 months, while oil slipped below $100 a barrel for the first time in three weeks.
"Global money supply will be wound back and the level of investment in commodities like oil will be pulled back," said Michael McCarthy, chief market strategist at CMC Markets.
Gold fell over 1%, extending last week's 7% decline, with investors shunning gold's appeal as a safe-haven asset.
