The Dow Jones Industrial Average dropped 195 points as Intel declined. The Dow also erased its gains for the month of August and posted a three-day losing streak. The S&P 500 fell 0.7 percent as financials and materials lagged. The Nasdaq Composite also pulled back 0.7 percent.
Bank shares led the way lower in the U.S. as Bank of America, Goldman Sachs and Morgan Stanley all dropped at least 1 percent. Tech shares also fell as Facebook, Alphabet and Amazon all declined.
"This is a classic, instinctive reaction in the market," said Quincy Krosby, chief market strategist at Prudential Financial. "Stocks are down while ... Treasurys are getting a bid."
"The currency issue in emerging markets, in Turkey, is nothing new. This is just exacerbated," Krosby added. She also noted that global central banks could take action to prevent the situation from getting worse. "Historically, you've seen central banks act to ease these types of situations. The goal for them is to minimize collateral damage."
The lira briefly fell 20 percent after President Donald Trump authorized the doubling of metals tariffs on Turkey.
Trump's comment came after Turkish President Recep Tayyip Erdogan asked citizens to "change the euros, the dollars and the gold that you are keeping beneath your pillows into lira," noting this is "a domestic and national struggle."
Turkish stocks also fell on Friday as the iShares MSCI Turkey ETF dropped 14.5 percent. The ETF was already down 42.3 percent this year prior to Friday's losses.
The drop came after a Turkish delegation returned from Washington with no apparent progress being made on the detention of Andrew Brunson, an American pastor detained in Turkey in 2016. Turkish authorities accuse Brunson of supporting a failed coup attempt earlier that year.
"The Turkish lira is plummeting for a variety of reasons most notably the central bank's refusal to raise interest rates to support it as well as a recent ramp up in U.S. sanctions," said Alec Young, managing director of global markets research at FTSE Russell. "Currency weakness is fueling inflation and making it more expensive for Turkey to repay its large foreign currency denominated debt."
The geopolitical worries come as the U.S. is embroiled in a trade war with China. This week both governments announced the possibility of imposing tit-for-tat tariffs on an additional $16 billion worth of goods.
European stocks fell sharply amid Turkey's currency turmoil. The Stoxx 600 index, which is made up of a broad swath of European shares, dropped 1.1 percent. The German Dax pulled back nearly 2 percent, while the French CAC 40 declined 1.63 percent.
Treasury prices rose, pushing yields lower on Friday. The benchmark 10-year yield fell to 2.875 percent while the two-year yield slipped to 2.61 percent. Treasurys are considered to be safer investments than equities.
"We're seeing a flight to quality, but that's not a surprise," said Paula Solanes, senior portfolio manager at SVB Asset Management. "This also comes with all the news on tariffs, so I think that's also adding to the move as well."
The Consumer Price Index rose 0.2 percent last month, the Labor Department said Friday. Meanwhile, "core CPI" hit 2.4 percent in July, its highest since September of 2008.
Friday's drop comes a day after the Nasdaq Composite scored its longest winning streak in close to a year, boosted by positive trade out of tech stocks including Amazon and Apple.
"The fact of the matter is, when you have 19 times earnings [on the S&P 500], it's not surprising to get a bit of a tumble" after getting headlines like the ones related to Turkey, said Michael Geraghty, equity strategist at Cornerstone Capital Group, "But I do think there is still strength left in equities" as earnings have been "undoubtedly strong."
Intel shares declined 2.6 percent after Goldman Sachs lowered its rating on the chipmaker, citing manufacturing issues.