WASHINGTON — Fear that the financial crisis is infecting once-healthy economies created another white-knuckle day for investors Friday, causing stocks to tumble from Tokyo to New York.Uncertainty also roiled currency markets as investors continued to turn to the security of the United States dollar and the Japanese yen and drove down currencies of developing countries like Brazil, Ukraine and South Korea and even of developed countries like Britain.
In the United States, where the crisis began, investors were less alarmed than elsewhere. A rout in Asian and European stock markets sent the Dow Jones industrial average swooning by more than 500 points in early trading in New York, but trading recovered enough ground through the day to leave the Dow down 312.30 points, or 3.6 percent.
Just a year ago, a drop of that size would have been considered a black day in the markets, but in these days of routine triple-digit declines, it offered a modicum of relief to traumatized investors.
Still, there were chilling new developments that attested to the wide scope of the crisis, despite efforts by heads of state, central bankers and corporate leaders to stop the bleeding. Cash flowed into the dollar and the Japanese yen, the two most sought-after safe havens in a storm-tossed world, as it fled from emerging markets.Hedge funds and other investors are pulling money out of these countries on an immense scale, analysts said, and putting it into dollars and yen. There were few safe harbors, as commodities also tumbled. Fears of a spreading global recession caused oil prices to fall 5 percent, to $64.15, even after OPEC, the oil cartel, announced it was cutting output. Government-backed mortgage bonds and debt issued by top-rated corporations were also dragged down in the undertow.
“This is a panic in the way of the fine 19th-century panics, where we all run around like headless chickens,” said R. Jeremy Grantham, chairman of the Boston-based investment firm GMO, who had predicted stocks would tumble. “I have been in the business for 40 years, and I have never seen anything like this.”
So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies.
Such a move — in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies — has been used extremely sparingly by the United States in recent years.
“The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,” said Kenneth S. Rogoff, an economist at Harvard.
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.
In the United States, the rescue effort may also grow. The Treasury Department, officials said, is weighing whether to expand its program of capital injections to encompass insurance companies, many of which own savings and loans, and is under pressure to include the financing arms of the auto companies. The government injections are currently reserved for banks.
The Treasury secretary, Henry M. Paulson Jr., appears to be drawing the line at investing in hedge funds, which, officials note, do not supply credit to the economy and are in the business of taking on large risks.
Indeed, hedge funds accounted for some of the turmoil on Friday. They are being forced to sell their stocks, bonds and other instruments to pay off their investors and lenders. Beyond that, investors are increasingly convinced that the global economy is headed for a long, painful recession.
“There has been tremendous activity in the currency markets, the commodity market and the stock market that reveal the fingerprints of forced selling,” said Marc D. Stern, chief investment officer of Bessemer Trust, an investment firm based in New York.
The flight to safety is hurting once-mighty currencies like Britain’s pound. On Friday, worries about how the financial crisis would affect Britain’s economy caused the pound to lose 8 cents against the dollar, falling to $1.53.
While a strong dollar might be a boon for American tourists abroad, it creates a host of problems for economies.
And the downdraft of the pound and the euro — which fell to $1.26 against the dollar on Friday, its lowest level in two years — is less serious for the economic well-being of Britain and Europe than the deterioration of currencies like the Mexican peso or the Russian ruble.
Even if the Federal Reserve, the Bank of Japan and other central banks intervened in the foreign-exchange markets, it was not clear that it would reverse the pressure on these currencies.
“I don’t see this as a crisis breaker,” said Simon Johnson, a former chief economist at the International Monetary Fund. “But it would help emerging-market companies, and give everyone a chance to catch their breath.”
The last time the Federal Reserve intervened in currency markets was in September 2000, when it teamed up with the European Central Bank and the Bank of Japan to shore up the faltering euro. Before that, the United States and Japan teamed up to buy yen during the Asian crisis in June 1998.
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