The Swiss franc and Japanese yen had notched up impressive gains against the dollar on Wednesday after U.S. President Donald Trump warned North Korea that it would face "fire and fury" if it threatened the United States.
Gold got an extra boost after data showed United States consumer prices rose less than expected in July, pointing to benign inflation that could make the Federal Reserve cautious about raising interest rates again this year. It has been more than a year since the last 5% downdraft in stocks and more than 76 weeks since the stock market suffered a 10% loss.
"The data confirms the Fed will have a wait-and-see attitude", said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.
Subdued US inflation has stirred doubts about the chances of another Fed interest rate hike this year, weighing on the greenback.
Technology companies led a broad slide in US stocks Thursday afternoon, putting the market on track for its biggest loss in two months.
Safe-haven demand rose after North Korea said it was "carefully examining" a plan to strike Guam, where a USA military base is located, shrugging off President Donald Trump's earlier warning that further threats to the United States will be met with "fire and fury".
The North Korea situation isn't the only thing weighing on stocks. The Nasdaq added 39.68 points, or 0.6 percent, to 6,256.56.
Paris stocks endured a torrid session to end 1.4 per cent down after a suspected terror attack in France.
The Korean won KRW=KFTC also continued to skid, sliding 0.3 percent to 1,145 won to the dollar, after earlier sinking to its lowest level in a month.
In Asia, benchmarks in Hong Kong and South Korea - which had been one of the best performers of 2017 - closed down 2% and 1.7% respectively, Friday, putting the week's drop at 2.5% and 3.2%.
The CBOE Volatility Index - a measure of investors' expectations for swings in the S&P 500 over the next 30 days - surged 44% to 16.04 Thursday - its highest level since U.S. Election Day.
The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors there will repatriate funds in a crisis.
The last time the S&P closed down more than 1 percent was May 17 when it fell 1.8 percent.
"U.S. markets had previously been becalmed amidst the Goldilocks scenario of strong profit growth, low interest rates and full valuations".
Tokyo was flat by the break as the yen stabilised against the USA dollar after the greenback edged higher from eight-week lows yesterday.
U.S. Treasury yields US10YT=RR fell to as low as 2.197 percent, their lowest level since June 28, overnight. Alliance Data Systems fell $6.28, or 2.7 percent, to $225.64.
Gold rose 0.6% to $1,268 (£976) an ounce and platinum gained 0.6% to reach $972.95 an ounce, having hit its highest since April at $979. The Russell 2000 index of smaller-company stocks gave up 13 points, or 0.9 percent, to 1,396.