The dollar rose to its highest in more than three months and US Treasury yields rebounded from two-month lows on Wednesday, after a Federal Reserve official said the central bank was close to raising interest rates.
The comments on Tuesday from Atlanta Federal Reserve President Dennis Lockhart, regarded as one of the Federal Open Market Committee's centrist policymakers, put next month back on the table for the first US rate hike in almost a decade.
Solid European corporate earnings, notably from French bank Societe Generale, boosted stocks after Lockhart's comments and a slide in Apple shares soured the sentiment the previous day.
The dollar's strength kept gold prices anchored near recent five-year lows, though oil clawed back a small part of the 20 percent it has lost in the past month.
"The market has been wrong-footed once more by the Federal Reserve," said Kathleen Brooks, research director at FOREX.com.
"A rate hike cometh - time for the market to play catch up."
The dollar index, which measures it against a basket of currencies, rose to 98.218, its highest since April 23. The greenback was close to multi-year highs against emerging market currencies including the South African rand, Brazilian real and Indonesian rupiah.
The euro fell 0.25 per cent to a two-week low of $1.0847 .
Don't fight bull market
Investors narrowed the odds on a September US rate hike, with Fed fund futures implying around a 1-in-2 chance, compared with around 1-in-3 after weak wage growth data last week.
Yields on 10-year Treasury notes rose 3 basis points on the day to 2.24 percent, having hit two-month lows around 2.14 per cent earlier this week.
In stocks, Europe's index of the leading 300 shares was up 0.8 per cent at 1,593 points, Britain's FTSE 100 was up a third of one per cent and Germany's DAX up 1 per cent.
France's CAC 40 was also up 1 per cent, led by a 8.5 percent surge in SocGen shares after the bank reported second-quarter results that beat analysts' forecasts.
A report on Spain's service sector, which showed the fastest pace of growth in three months and strongest hiring in eight years, also boosted investor sentiment in Europe.
Earlier in Asia, Japan's Nikkei rose 0.5 percent but MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.2 per cent.
In China, the CSI300 index of the largest listed companies in Shanghai and Shenzhen was flat after curbs on short-selling prompted a sizeable bounce on Tuesday.
There were also signs Chinese consumers could be taking over from manufacturers as the driving force for growth as the Caixin/Markit survey of services climbed to its highest in 11 months.
Losses on Wall Street on Tuesday had been modest with the Dow ending 0.27 per cent lower, while the S&P 500 eased 0.22 per cent and the Nasdaq 0.19 per cent.
Apple hit its lowest in over six months, apparently in part on worries about demand in China.
US futures pointed to a higher open on Wall Street on Wednesday.
"Rate hikes eventually burst bubbles, but it usually takes at least three. We think it is still too early to fight this bull market," Citi's US equity strategy team said in a note to clients.
In commodity markets, Brent oil rose 1 per cent to $50.46 a barrel and US crude gained 0.8 percent to $46.12, while gold eased to $1,085 an ounce.