A radical proposal by the Argentinian government for an effective monetary union with the US unsettled markets across the region. Brazil's Bovespa index had lost 3 per cent in early trading, and the real continued to slide after Thursday's dramatic fall. It touched a record low of 1.74 to the dollar before stabilising.
A brief nosedive by Internet stocks also sent the Dow Jones index tumbling. It was more than 175 points down at 9,088.75 by mid-morning before recovering.
Across the Atlantic, the FTSE-100 index ended 161 points lower at 5,861.2.
Falls in European share prices were led by companies such as Volkswagen, Fiat and Telefonica with a big presence in Brazil.
Reports that the US was discussing a currency union with Argentina met with confusing reactions in Washington, where officials did their best to dampen speculation while not writing the idea off entirely. "There is no formal working group or treaty process under way," a US Treasury spokeswoman said, but refused to say if there had been informal talks.
Argentina said that a working group led by the IMF, Argentinian officials and US Deputy Treasury Secretary Larry Summers was working on the idea, which would cede all monetary control to the Federal Reserve. Argentina has even talked about extending the proposal to create a continental currency system akin to Europe's Economic and Monetary Union.
US officials want to find a way to stabilise currencies, but are aware that creating a currency union raises some important problems - economic, financial and political - and would take years to finally create. And they say that they are more concerned about the underlying financial problems, and the reforms needed to correct them, than about quick fixes. In effect, as in Europe, they argue that economic convergence must precede any union of currencies.
Brazil's real has lost nearly a third of its value in 10 days. The country has seen more than $6bn fly out of the country since the start of this year.
Ken Wattret, an economist at Paribas in London, said: "Market sentiment has definitely turned on Brazil. The bottom line is things are very difficult and the market is particularly concerned about fiscal policy."
He added: "Worries about China are also starting to filter through. Capital protection seems to be the name of the game at the moment, and that is boosting safe haven flows."
The renewed flight to safety boosted the dollar yesterday. It climbed through the Yen114 level on fears that China might yet be forced to devalue its currency.
The Hong Kong market had earlier been swept by rumours that international trust and investment corporations might fail, following the recent collapse of one of these investment vehicles in Guangdong.Reuse content