Asian markets sank on Wednesday as an upbeat assessment of the US economy by Federal Reserve boss Jerome Powell fanned new fears of a sharp rise in interest rates.

In his closely watched debut before lawmakers the new central bank boss said the outlook had improved since December, when Donald Trump pushed through massive across-the-board tax cuts.

While it was a positive sign for the world's top economy, the appraisal spooked investors already on edge at the prospect of higher borrowing costs. They forecast four rate rises this year rather than the three previously expected.

Stephen Innes, head of Asia-Pacific trading at OANDA, said Powell's tone suggested he would be moderate, but added that “his pointer at the topside potential for both inflation and growth suggests the risks are skewed for a bolder monetary policy response”.

The Fed boss's comments sent all three main Wall Street indexes plunging more than one percent and the dollar surging against most other currencies.

The yield on the key 10-year US Treasury bond, a proxy for interest rates, also jumped.

World markets suffered a sharp drop at the start of February after strong jobs and wages data sparked concerns that inflation would surge, and in turn force the Fed to ramp up borrowing costs.

Oil extends losses

On Wednesday Hong Kong sank 1.4 percent and Shanghai closed down one percent. Traders were also weighed down by faltering Chinese factory activity, which slowed to a 19-month low in February.

While the reading was hit by the Lunar New Year break, it was a third successive monthly fall in the purchasing managers' index.

Tokyo finished 1.4 percent lower, hit by a stronger yen, while Sydney dropped 0.7 percent.

Singapore eased 0.2 percent and Seoul was off 1.2 percent, with Manila and Mumbai also lower.

However, Jim McDonald, Northern Trust Corp's chief investment strategist, remained upbeat.

“If they do go four times, we think it's going to be for the right reasons — which is that growth is good, inflation is not out of control,” he told Bloomberg TV. “That will not be a bad environment for risk-taking.”

With bets piling up on higher interest rates, the dollar rallied on Tuesday and extended the gains in Asia against the pound and euro, though the safe-haven yen edged back up.

The greenback also racked up strong gains against other regional currencies, with the Australian dollar down 0.5 percent and South Korea's won more than one percent down. The Thai baht, Indonesian rupiah and New Zealand dollar were also well down.

Mexico's peso, the South African rand and Canadian dollar were also almost one percent off.

On oil markets, crude extended Tuesday's slide of more than one percent. A stronger dollar makes the commodity more expensive for holders of other currencies.

Also, traders were weighing the prospect of rising US output at the same time as OPEC and Russia reconsider tapering their own production cap in 2019.

In early European trade London, Paris and Frankfurt each fell 0.5 percent.

Key figures around 0820 GMT

Tokyo – Nikkei 225: DOWN 1.4 percent at 22,068.24 (close)

Hong Kong – Hang Seng: DOWN 1.4 percent at 30,844.72 (close)

Shanghai – Composite: DOWN 1.0 percent at 3,259.41 (close)

London – FTSE 100: DOWN 0.5 percent at 7,244.83

Euro/dollar: UP at $1.2229 from $1.2227 at 2130 GMT

Pound/dollar: DOWN at $1.3895 from $1.3902

Dollar/yen: DOWN at 107.07 yen from 107.38 yen

Oil – West Texas Intermediate: DOWN 27 cents at $62.74 per barrel

Oil – Brent North Sea: DOWN 18 cents at $66.54 per barrel

New York – DOW: DOWN 1.2 percent at 25,410.03 (close).