The latest tensions began after US President Donald Trump on Tuesday warned North Korea that it would face "fire and fury" if it threatened the United States.
July's 0.1 percent increase in consumer prices suggests that the Federal Reserve may be less likely to raise interest rates next month.
Missile makers Raytheon and Lockheed Martin have outperformed Wall Street by nearly four per cent in recent days and the Dow Jones US defence index is at a record high and on a seven-day unbroken run of gains.
Manufacturing production in June was flat, as predicted, after falling 0.1% in May, while United Kingdom construction output badly missed forecasts fell 0.1% month on month and rose 0.9% year-on-year.
The Vix, a measure of how much volatility investors expect in stocks, jumped to its highest level since May after North Korea revealed a plan to launch ballistic missiles toward a major US military hub in the Pacific.
The pan-European FTSEurofirst 300 index lost 1.01 per cent and MSCI's gauge of stocks across the globe shed 0.26 per cent for a weekly loss of 1.6 per cent, the largest since the week to November 4. The 1.3 percent gain for the market's main other choice for borrowing to fund speculation, the Swiss franc against the euro, is its biggest rise in more than a year. Hong Kong's Hang Seng Index plunged by 2%, while South Korea's Kospi Index slumped by 1.7%.
ANALYST TAKE: "We're seeing significant risk aversion in the markets on Wednesday, with the escalation in tensions between the USA and North Korea triggering moves into safe haven assets", said Craig Erlam, senior market analyst at OANDA.
European markets were also struggling amid the simmering political stand-off, with the Cac 40 in France dropping 1.4% and Germany's Dax tumbling by 1.1%.
Earlier, the dollar slipped as low as 108.91 yen, its weakest level since June 14, when the greenback fell as low as 108.81 yen.
Seagate Technology gained 2.3 percent after investor ValueAct disclosed that it had acquired a 7.2 percent stake in the company.
Currency traders consolidated positions in the Japanese yen and Swiss franc, and nudged up the dollar index by unwinding some of the recent big bets on the euro.
The S&P is trading near its most expensive valuation level since 2004, as measured by the price-to-12-month forward earnings ratio.
Dudley also cautioned that "it's going to take some time" for inflation to rise to the central bank's 2 percent target even as he offered a generally positive outlook for the USA economy, job market and price pressures. Financials .SPSY fell the most, down about 1 percent. "There are four more (inflation) prints between now and the December FOMC meeting and we expect the Fed to remain data-dependent, if a touch more cautious", TD Securities said in a note.
Spot gold prices were slightly lower at 1,285.22 an ounce, touching a two-month high earlier.
The price of oil was also 0.3% ahead at 52.29 USA dollars a barrel, with stockpiles coming under pressure from falling crude oil imports and record processing at American refineries. "Indeed, the biggest increases in the price of gold have occurred when the U.S. bombed Libya in 1986, in the wake of the Gulf War in 1990, and, more recently, when ISIS attacks put oil supplies in the Middle East at risk".