The dollar loomed large over fragile financial markets on Tuesday, with worries about rising interest rates, global growth and geopolitical tensions unsettling investors, while the yen was testing levels that have prompted official intervention.

The yen
hit 145.80 per dollar overnight, just 10 pips short of the 24-year trough it made before the Japanese government stepped in to prop it up three weeks ago. Japan returned from a holiday on Tuesday and the yen sat at 145.65.

Strong U.S. labor data and an expectation of inflation figures due on Thursday to remain stubbornly high have all but dashed bets on anything but high interest rates through 2023 and are driving the dollar back toward multi-decade highs.

Russia rained missiles upon Ukraine’s cities on Monday in retaliation for blast that damaged the only bridge linking Russia to the annexed Crimean peninsula, with the escalation putting markets in a risk-averse mood.

The risk-sensitive Australian
dollar made a 2½-year low of $0.6275 on Monday and hovered at $0.6296 early on Tuesday. Analysts at the National Australia Bank said the Aussie was the market’s “whipping boy” in a sell off and that further lows were possible in the near term as sentiment is fragile.

The New Zealand dollar
also made a 2½-year low at $0.5545 on Monday and is close to breaking its pandemic trough, with weak data from China further souring the mood.

“Our expectation for the world economy to enter recession next year is consistent with further gains in the dollar,” said Commonwealth Bank of Australia strategist Carol Kong.

U.S. dollar index
was up 0.053% at 113.12, not far off the 20-year high of 114.78 it touched late last month.

Britain’s markets remain on edge and not exactly soothed by the Bank of England stepping up bond buying and finance minister Kwasi Kwarteng promising to bring forward some budget announcements.

Gilts sold sharply overnight and sterling was wobbly, sliding to a 10-day low of $1.1027 on Monday. The pound
was up 0.28% at $1.1090 on Tuesday.