Earlier, Trump warned North Korea on Tuesday it would face "fire and fury" if it threatens the United States, prompting the nuclear-armed nation to say it was considering firing missiles at Guam, a USA -held Pacific island.
But U.S. stocks regained some lost ground, despite Trump's comments Friday that U.S. weapons are "locked and loaded", ready to respond if North Korea acts "unwisely".
When Iraq invaded Kuwait 27 years ago this month, the S&P 500 fell 1.1 percent, and was down 9.3 percent 20 days later.
US stock-index futures pointed to more losses for Wall Street on Thursday as tensions between the USA and North Korea showed few signs of easing.
S&P 500 e-minis were down 4.5 points, or 0.18 percent, with 209,543 contracts traded.
"I do think I expect inflation to also start to move higher in the medium term but probably not get all the way back to 2-percent on a year-over-year basis, because, remember, we've had these very weak inflation readings for a number of month", Dudley said.
Emerging market stocks lost 1.20 percent.
Escalating tensions around Pyongyang's nuclear ambitions sent a shiver through markets worldwide and pushed the dollar to below 109.7 yen in afternoon forex trade to an eight-week low against the safe haven currency, piling more pressure on Japanese stocks.
North Korea claimed "only absolute force" can work on someone as "bereft of reason" as Trump and detailed plans to fire a salvo of missiles into waters around the US Pacific territory of Guam. Hong Kong's Hang Seng Index dropped 1.69%, while mainland markets saw the Shanghai Composite dip 1.04%.
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Prior to this, the pair had met only once during a Davis Cup World Group play-off in 2012, when Federer clinched a 6-1, 6-4, 6-4 win.
The dollar was further weighed on Friday by the soft USA inflation data.
Many world stock markets have hit record or multiyear highs in recent weeks, leaving them vulnerable to a sell-off, and the tensions over North Korea proved to be the trigger.
The dollar index fell 0.32 per cent, with the euro up 0.42 per cent to US$1.1819.
"Tomorrow will be telling, as we see if selling continues, and if there are any bargain hunters", Silverblatt said.
The 30-year bond US30YT=RR last rose 5/32 in price to yield 2.8107 percent, from 2.818 percent late on Wednesday.
Overall, gold continued to edge higher to the $1,280 per ounce area in European trading.
USA credit card processing company Vantiv secured a deal to buy British-based rival Worldpay for 8 billion pounds ($10.4 billion) Wednesday in a bid to create a $29 billion global payments powerhouse.
U.S. crude rose 0.41 per cent to US$48.79 per barrel and Brent was last at US$52.01, up 0.21 per cent.