Yen Rally Sends Shock and Selling Through Markets

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There are rip-your-face-off rallies and then there are the rip-your-face-off retreats—the kind Wall Street experienced Thursday during a brief but vicious yen surge.

At one point, the U.S. dollar lost about 4 percent to the Japanese currency as the pair trade tumbled through its 50-day moving average.

The move sent the Dow industrials plunging 115 points after flirting with positive territory through most of the early session, and delivered a quick but palpable shock through all levels of financial markets.

(Read More: Dollar and Stocks Could Be Ready to Part Ways)

"Right now this just looks like a bunch of nervous hands," said Christopher Vecchio, currency analyst at DailyFX. "The dollar was a very extended trade. This is the unwinding of that very crowded trade."

Traders attributed market jitters to several factors: A speech earlier by European Central Bank leader Mario Draghi, who seemed to indicate that further monetary easing was not imminent; political turmoil in Turkey; and an anticipation that Friday's U.S. nonfarm payrolls report was likely to disappoint.

(Read More: ECB Holds Rates and Cuts Growth Forecast)

Then, just like that, the panic unwound.

Vecchio saw the move as being temporary and predicted the payrolls number would beat expectations.

Within an hour or so, the dollar still traded sharply lower against the yen, but losses had been halved. Equity markets stabilized, with the Standard & Poor's 500 even briefly dipping into positive territory, and order seemingly came back to the markets.

The dollar has been on a downslope lately as economic data have turned weak and fears are growing over whether the Federal Reserve is planning an early exit from its aggressive easing program.

(Read More: Why Bad News Soon May Just Become...Bad News)

But prior to the retreat, it had been moving higher with the stock market, reversing a trend that has been in place for much the post-financial crisis market era.

"Ultimately that's a good sign for the U.S. economy," Vecchio said of the strong dollar-stocks correlation. "That means people believe in the dollar not just as a safe haven but as a growth currency."

The aftereffects of Thursday's blowup, though, had traders wondering if patterns were beginning to change.

"In equity land all of a sudden you're starting to get a perforation, like you're getting ready to tear that sheet," said Michael Gurka, managing director at Spectrum Asset Management. "This could be the beginning of—I don't want to call it a tipping point—but of something unfolding. Was 6/6 the first sign?"

_ By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.