Great forces were at work yesterday in currency markets, and they'll have a profound effect on technology markets if there is not a fundamental reversal. Financial analysts and market theorists were at a loss to explain why currency markets moved in such extraordinary ways over the last two days. The only reasonable conclusion is that strange things happen when a financial system is "in extreme distress" as the FT Lex column put it this morning. Chartists were going back 25 years to find similar circumstances. The actual exchange rates and closing prices only tell part of the story. There are psychological factors that probably give more information than the figures. Financial markets have never been noted for being rational, but when they are unable to understand the irrationalities, there is considerable distress, largely caused by fear of a collapse because the market has risen too far. These things are hardly even the subject of whispers in the US, lest panic seizes the market: the focus for most investors is to maximise their pension arrangements by investing. The US dollar fell against the Yen as a result of speculation on a fall in the Yen, causing Tiger, a major US hedge fund managing some $20 billion (and reputed to have lost $1.8 billion of its clients' money in October) trying to buy Yen to cover its position. Their bet - that the Yen would weaken and the dollar strengthen - was wrong on the evidence of the last two days. Since Tuesday, the dollar has fallen Y20, and at one point was below Y112. Masaru Hayami, governor of the Bank of Japan, said the Yen's rise was too rapid. The bank had been hoping for a further fall in the Yen to help Japan out of recession by making exports cheaper. The Nikkei fell 6 per cent to 13,206, Nasdaq was down 3 per cent, and the FTSE off 3 per cent. The Dow ended only marginally down 10 points, but trading was at one point down 270. A case is being made by some for a strong Yen supporting Asian currencies, but the more likely result would be a significant further collapse in Japanese manufacturing. Exchange rate volatility on the scale seen yesterday will turn the semiconductor market into even more of a bazaar than it is now. Another trend is the extreme caution being exercised by financial institutions, which will not help technology companies with their existing bank facilities, nor make venture capital easier to get. With Japan in recession and the currency strengthening, the result could be a depression. Much of the Japanese current account surplus is invested in the US, and has the effect of ameliorating the US deficit. The likely result would be that the dollar will further weaken. There is already evidence that the Japanese are repatriating this overseas capital as the Yen strengthens. The result will be that US stock markets will be driven down - but if the trend were to continue and stabilise, it would have the effect of making US manufactures more competitive, and lead to a worsening situation in Japan and the Far East generally. To summarise: nobody really understands the current market forces, since sentiment plays such a large role. An adverse currency movement against the dollar had not been widely anticipated in the US. The consequences, if sustained, could be a strengthening of the US economy as imports lessened and exports increased. The Asian economies would weaken further, and the European high-tech industry would do better if the Asian technology industry faltered. ® Click for more stories