The US dollar suffered a severe sell-off on Friday, taking it to its weakest level against a trade-weighted basket of currencies since October 1997, as fears about the US current account deficit crossed world markets.

Worries about US inflation, which have intensified since this week’s meeting of the US Federal Reserve’s rate-setting open market committee on Wednesday, sparked further sharp losses for US stock markets. The Nasdaq Composite fell a further 1 per cent in morning trading after its 2 per cent fall on Thursday.

US government bonds also suffered, bringing the yield on the benchmark 10-year bond to its highest level in four years.

The dollar has lost 7 per cent against the euro, yen and sterling since the beginning of April – a slide that will in turn intensify worries about inflation in the domestic economy.

Traders are concerned about the role that a weaker dollar will almost certainly have to play in correcting the US deficit, which is now about 7 per cent of gross domestic product.

Marc Chandler, economist at Brown Brothers & Harriman in New York, said: “Precisely what officials feared would happen from the large global imbalances is now taking place in reaction to their clumsy attempt to ‘fix the problem’. Volatility in the capital markets is rising. Global equities are tumbling.”

Friday’s US trade figures intensified concerns, even though they showed a narrowing in the deficit, as they also showed a rise in import prices.

Previous dollar sell-offs have foundered in Asia, with countries in the region intervening heavily to prevent their currencies rising too far against the dollar, leaving Europe to bear the brunt.

However the current sell-off, which has seen the dollar fall against the likes of the yen and South Korean won, as well as European currencies, has led to speculation of a tacit agreement to weaken the dollar. It is now referred to as a “Plaza-lite”, in reference to the 1985 Plaza Accord, when industrialised nations united to weaken the dollar.

By mid-session in New York, the dollar had pulled off it lowest levels of the day to sit at Y110.39 to the yen, with traders cautioning that a correction was likely.

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