The result of the global stock markets dropping like a rock (the Nikkei hit its lowest level since April 2003, falling 9.6 percent to 7,649) is that investors are running to the dollar and yen as safe havens.
Being dumped are the emerging-market currencies. South Korea is looking particularly vulnerable (the Kospi lost over 50 percent of its value this year).
The new strength in the yen is not good for the export-reliant Japan and many companies (notably Sony) slashed their projections for the year. Exports were a bright spot in the U.S. economic picture and a strong dollar is going to spell trouble for that as well.
But the real concern is the flight from other currencies.
“When a developing country’s currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.” http://www.nytimes.com/2008/10/25/business/25currency.html
These concerns are leading industrial country policy makers to talk about a coordinated effort of central banks to sell dollars and yen and buy other currencies.
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