By ALEX FRANGOS HONG KONG—The selloff in the euro is spreading to once high-flying emerging-market currencies, as investors flee local stocks and bonds on fears a default in Greece could lead to a more serious global mess. The South Korean won and Indonesian rupiah tumbled against the relative safety of the U.S. dollar and Japanese yen while central banks in Seoul and Jakarta tapped reserves and each spent around $1 billion Wednesday in foreign-exchange markets to support their currencies, according to traders. Despite the efforts, the dollar rose 3% against the won to its highest level since March. The dollar rose 1% against the rupiah, though was higher before Indonesia dipped into markets. The South African rand also fell more than 1%. The Australian dollar, seen as a proxy for economic growth in emerging markets such as China and India, fell more than 1% to $1.019, its lowest level since markets swooned after the Japanese earthquake and Tsunami in March. Getty Images The moves represented the latest sign of how Europe's debt problems are again filtering through financial markets thousands of miles away. For weeks, Asian currencies have held their own as local stock markets gyrated along with those in the U.S. and Europe. Some even spoke in the wake of the downgrade of U.S. debt and Europe's problems of new safe currency havens in places such as the Singapore and Australian dollars, both backed by AAA-rated debt. "For some time, Asian currencies were very stable, but the fear factor got so intense the breaking point came today," says Paul Mackel, currency strategist for HSBC in Hong Kong. Investors turned Wednesday to the currencies with the deepest markets and reputations for shelter during the worst storms, the yen and the dollar. That's despite the debt of both the U.S. and Japan being rated below AAA and their underlying economies weak and government fiscal positions stretched. The Singapore dollar has fallen 3% against the dollar over the past week. More Euro Remains Below $1.40 "You can't fight it, it's like standing it front of a train," Mr. Mackel said of investors' rush for the old currency standbys, which also performed well during the financial crisis in 2008 and 2009. The pressure had been building since Friday when the euro took a new leg down below $1.39 for the first time since March. With the dollar rising, that forced investors to liquidate bets on Asian currencies, which are often positioned in a way to rely on dollar weakness. The Korean won was particularly hard-hit Wednesday and accompanied by a sharp stock market drop. The Kospi Composite fell 3.5%. Because more than 30% of the Korean stock market is owned by foreigners, when they sell, they often convert their proceeds into their home currencies, usually dollars. In the case of Indonesia, the selloff was driven partially by investors in local currency bonds. The yield on benchmark 10-year Indonesian government bonds climbed to around 7.2% Wednesday from Tuesday's 6.7%. Local currency bonds have been a fashionable bet over the past two years as weary Western investors piled into places such as Indonesia, Philippines and Brazil, attracted by higher yields. Another magnet was the potential for currency appreciation thanks to the underlying strength of the economies, especially compared with the U.S., Europe and Japan. Foreign ownership of Indonesian government debt has gone from 15% in 2009 to more than 35% today. Many investors have left those holdings unhedged with respect to the currency as a way to juice returns from a rising rupiah. Bolstering the bets on local currency bonds, the Indonesian and Korean central banks both signaled earlier this year they would tolerate currency appreciation as a tool to fight inflation. A stronger currency makes imported goods, especially oil and other commodities, cheaper and thus lessens their inflationary impact. But the Indonesian central bank signaled in a policy statement last week that it has become less concerned about inflation, which means it will also likely not be as supportive of a strong currency. That sent bond investors for cover. Some sold positions, driving bond yields higher. Others moved into the currency forwards market to hedge against losses from the rupiah falling, while still holding on to their bonds, according to Craig Chan, currency strategist at Nomura in Singapore. That made the moves in the currency more pronounced than those in the bond market, which he says isn't "a massive selloff" by Indonesian standards. To calm nerves, Indonesia Director General of Debt Rahmat Waluyanto said Wednesday that the drop in prices for government bonds didn't mean money was necessarily flowing out of the country. "Some investors are getting more worried with euro-zone debt issues and they're shifting to the U.S. dollar," Mr. Waluyanto told reporters after a parliamentary hearing, adding "we do not see any sign of fund reversals so far."

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