The yen - a favorite for carry trades at times of economic stress - hovered back near 15-year high against the dollar after investors brushed off Japan's attempt to weaken the currency, yields on benchmark German government bonds hit record highs and the Swiss franc soared against the euro and dollar.
Mounting U.S. economic concerns likely to keep investors away from riskier assets and push up the yen, keeping pressure on Japan to intervene directly in currency markets for the first time in more than six years. Crude prices, seen as a proxy for world economic growth, also came under pressure, and were down 6.6 percent so far in August and on track for their worst monthly losses since May.
World stocks measured by MSCI All-Country World Index <.MIWD00000PUS> lost 0.9 percent. The index was also headed toward its worst monthly performance in three months.
Tokyo's Nikkei average <.N225> shed 3.6 percent, its worst daily drop in three months, after the Bank of Japan's move the day before to boost cheap loans to banks failed to curb the yen's strength.
In Europe, the FTSEurofirst 300 <.FTEU3> index dropped 1.1 percent and the Thomson Reuters Peripheral Eurozone Countries Index <.TRXFLDPIPU> fell 1.3 percent. If you look at all the noise, all the volatility and all the nervousness, it's clear that this market has one major fear at the moment and that's the double dip, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
And we are not going to have the answer to that one until the fourth quarter. There is more downside risk for equities over the next couple of weeks.
The VDAX-NEW volatility index <.V1XI>, Europe's main barometer of investor anxiety, rose 3.4 percent. The higher the volatility index, the lower investors' appetite for risk.
YEN NEAR 15-YR HIGH
The dollar was down 0.4 percent at 84.27 yen, not far from its 15-year low of 83.58 hit last week. The U.S. currency fell 2.5 percent against the Japanese currency this month after sliding 2.2 percent in July.
Japan's ministry of finance is sending signals that is willing to intervene but clearly people remember its struggle with intervention a few years ago, said Simon Derrick, head of currency research at Bank of New York Mellon.
If they don't intervene when the yen is at 84, when will they do it? Once its goes to all time lows? I think their resolve of staying away from intervention will be tested.
Japanese Finance Minister Yoshihiko Noda repeated on Tuesday that the government would take decisive action on currencies -- usually seen as code for intervention -- when necessary, but reaction in the market was limited. The yen has lost more than 9 percent versus the greenback so far this year.
The euro fell 0.5 percent against the yen to 106.65 yen, crawling toward a nine-year low of 105.44 yen hit last week.
The single currency also fell to an all-time low against the Swiss franc, which also hovered close to a seven-month high against the dollar.
Yields on benchmark 10-year German Bunds hit record lows at 2.085 percent, while those on 10-year U.S. Treasuries slipped 2 basis points to 2.5143 percent, hovering near 18-month low.
In the commodity market, oil lost 1.4 percent to trade below $74 a barrel, while copper dropped 0.9 percent but was still up 1.3 percent this month.
(Additional reporting by Atul Prakash, Anirban Nag and William James in London; Editing by John Stonestreet)