It raised the rate by 75 basis points to 11.5 per cent to head off a crisis of confidence in the krona that has affected markets far beyond the remote north Atlantic island that has a population of 300,000.

About 10,000 miles away, New Zealand, which also has experienced a sharp run on its currency, said another slide in its dollar could jeopardise an expected cut in its high interest rate.

Iceland and New Zealand have been big beneficiaries of the global carry trade in which investors from US hedge funds to Japanese retail investors borrowed in cheap dollars, euros and yen to chase better returns in countries with higher interest rates.

But these trades have started to unwind as rate tightening in the US and the eurozone, and the risk that Japan may follow suit later in the year, threaten to mop up global liquidity and to narrow currency rate differentials.

The Icelandic krona has fallen 12 per cent against the US dollar this year, and the New Zealand dollar is down 10.7 per cent as both currencies have hit lows.

As carry trades unwind, investors are focusing on economic fundamentals in Iceland and New Zealand. Both these small countries have big current account deficits, as does Hungary, where the forint has fallen 5.1 per cent this year. Turkey, Australia and South Africa are also seen as potentially vulnerable.

Many commentators want New Zealand’s Reserve Bank to trim the interest rate of 7.25 per cent to stimulate economic growth. This is expected to fall to 1 per cent against the backdrop of a record current account deficit of NZ$13.7bn (£4.8bn).