But this apparent paradox could soon be resolved, triggering a significant decline in the dollar, if the booming U.S. economy shows clear signs of slowing down, analysts say.
The decline in global equities over the past two months reflects growing concern about a possible hard landing of the U.S. economy, a scenario in which fast growth and rising inflation prompt the Federal Reserve Board to raise interest rates sharply to throttle the economy.
The impact has been striking. Since early April, only four of 34 small or emerging market economies monitored by State Street Bank - India, South Korea, Norway and Singapore - have seen inflows of foreign investment.
''It's market volatility and economic uncertainty,'' said Avinash Persaud, currency strategist at State Street Bank in London. ''Market participants in that environment don't take risks.''
Lehman Brothers' index of global hazard, which is based on currency values, is at its highest level since Russia's debt default in 1998.
The New Zealand dollar has fallen to its lowest level, the Canadian and Australian dollars have tumbled despite good economic conditions at home, and East European currencies have declined across the board.
''Investors are running for cover, and will probably stay there until the U.S. economy tips its hand,'' said John Llewellyn, chief economist at Lehman Brothers.
So far this process has supported the dollar, even though U.S. stocks, and particularly technology shares, have been tumbling. That is because much of the selling in emerging markets has been done by U.S.-based investors pulling their funds back home, analysts said.
''The process of going home is good for the dollar,'' Mr. Persaud said. But, he added, ''once they're home, the dollar's vulnerability will be revealed.''
The United States needs big investment inflows to finance its current-account deficit of about 4 percent of gross domestic product, Mr. Persaud said. But the decline in U.S. equity markets tends to deter foreign investors, he said, and the repatriation of funds by American investors cannot continue indefinitely.
The dollar's fortunes will depend heavily on the U.S. employment figures for May, which will be made public Friday.
Strong job growth, when the unemployment rate is already at a 30-year low of 3.9 percent, would raise expectations for further aggressive rate increases, supporting the dollar and unsettling stock markets, analysts said. But if the figures suggest that growth is slowing from its 5.4 percent first-quarter pace, interest-rate expectations should moderate and the dollar should decline, they said.
Another factor in the equation is the Bank of Japan's zero interest-rate policy, which has given Japanese investors a strong incentive to invest in U.S. securities. The central bank will have to raise rates as the economy recovers, though analysts do not expect any action before August or September. Higher rates in Japan would very likely lead investors to repatriate some of their holdings from the United States, strengthening the yen against the dollar.
Richard Davidson, chief economist in Europe at Morgan Stanley Dean Witter, predicted that the euro would rise to $1 in the third quarter and to perhaps $1.05 by the end of the year, as the U.S. economy slows and European growth continues to accelerate beyond 3 percent.
Given the uncertainty about the U.S. economy, many analysts played down the importance of the 2 percent decline Friday in the dollar against the euro.
Paul Chertkow, currency analyst at Bank of Tokyo-Mitsubishi in London, said the euro rose Friday because of suggestions of intervention by members of the European Central Bank rather than any shift in perceptions about the U.S. economy. ''It's much too early to say the euro has turned,'' he said.
Some analysts say that the U.S. economy will continue to outperform those of Europe and Japan, keeping the dollar firm.