World financial markets were yesterday shaken by the extraordinary volatility of the US dollar, which at one point dipped below 112 yen against the Japanese currency - an unprecedented slide of Y20 since Tuesday.

Equity markets fell sharply again, with the ISEQ index in Dublin dropping by more than 4.5 per cent in value.

Traders said pressure on the dollar had come primarily from hedge funds and other speculators being forced to unwind their currency positions to cover losses in emerging markets. Fears of a liquidity squeeze in the US banking sector exacerbated the sell-off.

"This is Volatility with a capital `V'," said Mr Jeremy Hawkins, chief economist at Bank of America in London. "It is all looking distinctly horrible and there is more to come."

Senior Japanese officials said at least one large US hedge fund had been particularly active in seeking to buy yen, apparently to repay loans, in recent days.

Unusually by recent standards, bonds and equities fell together, with stocks in Tokyo and Europe suffering as investors worried about the effect of the weaker dollar on the two regions' exporters. In Tokyo, the Nikkei average of 225 leading shares fell 5.8 per cent to close at 13,206.06. It is down a quarter from its year-high in March. European markets were also hit. Share values in Dublin plunged yesterday, with almost £1.7 billion knocked off the value of Irish shares, as the ISEQ fell by more than 179 points, with leading stocks suffering significant losses. In Frankfurt, the DAX fell 5 per cent and in Paris, the CAC-40 dropped 4.5 per cent. In London, the FTSE 100 closed down 130 at 4,698.90 with investors believing that a 0.25 percentage point reduction in interest rates announced by the Bank of England was not enough.

Meanwhile on Wall Street, the Dow Jones Industrial Average was down more than 220 points by 1.40 p.m. New York time. It later recovered ground and closed down just 9.78 points at 7731.91. But this reflected a recovery in a number of blue-chip stocks, with the broader-based Nasdaq index ending down 3 per cent.

What jarred many in the market was the speed of the dollar's descent as many would-be buyers sat on the sidelines during the morning slide.

The dollar later rebounded slightly on market rumours of intervention by the US Federal Reserve on behalf of the Bank of Japan.

Meanwhile in Japan, the yen's surge has shocked officials, with the Bank of Japan saying that its rise was "too rapid."