The yen weakened against the dollar and Deutschmark following a keynote speech by Keizo Obuchi, the new Japanese Prime Minister, on economic reform. There was heavy selling of the Hong Kong dollar, and the Chinese yuan fell to a five-year low against the US dollar on Shanghai's black market.
Vietnam devalued its currency in an attempt to improve export competitiveness. The state bank lowered the "fixing rate" of the dong to 12,998 to the US dollar from 11,814.
In Hong Kong, a year to the day after the Hang Seng equities index hit an all-time high of 16,820, the market tumbled to its lowest level in three years. Yesterday the index closed at 7,018.4, down 235.95 points.
In his first policy speech before parliament, Mr Obuchi promised tax cuts for next year worth well over 6 trillion yen (pounds 27bn). He reaffirmed his commitment to reforming Japan's banking system, although analysts were disappointed by the lack of detail, and the yen weakened to 146 to the US dollar.
Stephen Hannah, chief economist at IBJ International, said: "What the market is looking for is a more realistic approach. It's looking for dramatic surgery on the banking system." Michael Derks, of Nomura International, agreed that financial sector reform should be the priority for the new government. He said: "Tax cuts aren't the solution. What desperately needs to happen is the banking sector needs to be fixed up."
A senior US Treasury official urged Japan to move quickly to enact the economic stimulus package and reform its banking sector. He said: "Prime Minister Obuchi outlines some promising and constructive steps to stimulate Japan's economy. We urge the government to move as quickly as possible to put them into place."
The renewed yen weakness and the worsening economic conditions in China rekindled fears of a devaluation in the yuan. Mr Derks said: "The situation in China has definitely worsened. The floods will have an enormous economic impact."
The yuan fell to 9.2 to the US dollar on the Shanghai black market, 9 per cent lower than the official rate. Analysts said fears of a Chinese devaluation also lay behind the fall in the Hang Seng and the pressure on the Hong Kong dollar.