Higher U.S. yields are anything but favourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.
Bond prices fell across Asia and long-term Japanese yields reached ground not visited since early 2016, a market tightening not warranted by domestic economic conditions.
"A simple dynamic is playing out in the global economy right now - the U.S. is booming, while most of the rest of the world slows or even stagnates," said HSBC economist Kevin Logan.
"A Federal Reserve that is raising rates to prevent the U.S. economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying."
MSCI's broadest index of Asia-Pacific shares outside Japan skidded 1.7 percent in response, with South Korea, the Philippines, Indonesia and Taiwan all down.
Even the Nikkei eased 0.3 percent, as rising yields offset the boost to exporters from a weaker yen. EMini futures for the S&P 500 also lost 0.4 percent in Asian trade, while European bourses were seen starting mixed.
The dollar had taken off after an influential survey of the U.S. services sector showed activity at its strongest since August 1997, sparking speculation the payrolls report on Friday could also surprise.
"The (ISM) index was significantly above the long-term average during periods of growth and consistent with the upside risks to growth," said Kevin Cummins, senior U.S. economist at NatWest Markets.
"At a minimum, these data suggest that labour demand remains very strong."
Federal Reserve Chairman Jerome Powell declared the economic outlook was "remarkably positive" and said rates might rise above "neutral", currently anywhere from 2.5 to 3 percent.
DOLLAR TRACKS YIELDS
A Fed hike in December is now put at an 8 in 10 chance, while investors lifted expectations for how high rates may eventually go.
Fed fund futures for December 2019 sank to a contract low of 97.095, implying a rate of 2.905 percent. At the start of this year they had looked for only 2.1 percent.
Yields on 10-year Treasury debt were up at 3.225 percent, having spiked 12 basis points overnight. That was the steepest daily increase since the shock outcome of the U.S. presidential election in November 2016.
The jump in yields boosted financial shares on Wednesday, putting the S&P 500 within striking distance of a record. The Dow rose 0.2 percent, while the S&P 500 gained 0.07 percent and the Nasdaq 0.32 percent.
The groundswell of economic optimism swept the U.S. dollar to a six-week high on a basket of currencies and it was last trading up 0.34 percent at 96.086.
The gains were broad based with the euro falling back to $1.1471 after being as high as $1.1593 on Wednesday.
The dollar shot to its highest so far this year on the yen at 114.55 before steadying at 114.40. It was now threatening a major peak from November 2017 at 114.735.
In Asia, the Indian rupee and Indonesian rupiah have been under heavy fire, in part because both countries are being squeezed by the soaring cost of imported oil.
Oil prices have reached four-year peaks as the market focused on upcoming U.S. sanctions on Iran while shrugging off the year's largest weekly build in U.S. crude stockpiles.
Brent eased 17 cents to $86.12 a barrel on Thursday, while U.S. crude fell 15 cents to $76.26. - Reuters