Why is Windows' default IP address 169.xx.xx.xx?

It's not MS it is the ISOC ;-)

Have a look at reserved IP address RFC 5735 under special use IPv4: here

169.254.0.0/16 - This is the "link local" block. As described in [RFC3927], it is allocated for communication between hosts on a single link. Hosts obtain these addresses by auto-configuration, such as when a DHCP server cannot be found.

The use of 169.x.x.x addresses are defined within a standard colloquially known as APIPA - Automatic Private IP Addressing.

In a nutshell, if a network device has not been assigned a fixed (static) address and cannot obtain one by asking (DHCP), the device says to itself, "Well, I'd better make up an address of my own so I can communicate on this network", so it assigns itself an APIPA address, which start at 169.254.0.1 and run up to 169.254.255.254.

If you suddenly find your computer has an address within the AIPIA range it usually means that the device on the network dishing out addresses (the DHCP server) is not contactable for some reason; it may be switched off or your network cable has become disconnected, for example.

To state Dan M's answer in another terms, your DHCP server has a problem and cannot allocate an IP address. When Windows and any other OS is configured to get an IP via DHCP and they don't get any, they automatically assign 169.254.xxx.xxx IP