Asian shares fell to new two-year lows on Thursday as further signs of a slowing global economy — from the United States to the euro zone — hit export-dependent sectors such as technology.
The dollar held steady at near an eight-month high against the euro ahead of the European Central Bank's (ECB) meeting later in the day, which is widely expected to result in no changes to interest rates.
Concerns that earlier this year had centred in the United States are now expanding to other regions as well, contributing to the recent rebound of the dollar against other currencies.
Shifting expectations for global interest rates are playing a role as well. Investors are betting the ECB will cut rates later this year or next year, in contrast to the U.S. Federal Reserve, which is set to tighten monetary policy over 2009.
The steep rebound in the dollar, plus concerns over weakening global demand, have also hit oil prices, with crude dipping toward $109 a barrel even as Hurricane Ike strengthened into an extremely dangerous Category 4 on its way towards the southeast U.S. coast.
"Economic conditions are worsening in countries other than those of the dollar and the degree of their deterioration is becoming clearer and clearer," said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ.
The MSCI index of Asian stocks outside Japan fell at one point to its lowest since November 2006, and was down 1.1 percent as of 0600 GMT.
But European shares were set for a flatter open ahead of the ECB's meeting.
The concerns over global economic growth were reinforced after euro zone data on Wednesday showed falling investment and private consumption led to the first ever quarterly contraction from April to June.
The outlook in the United States remains weak as well, with the Fed's latest Beige book report showing economic activity was slow in August.
Asia is struggling as well, with major economies such as Japan believed to be at or near a recession.
Tokyo's Nikkei index fell 1 percent, weighed down by Advantest Corp and other technology shares.
Other major indexes in the region fell, with Taiwan sliding 2.6 percent, Singapore down 1.9 percent, and India down 1.4 percent.
Markets in Hong Kong and Shanghai were down less than 1 percent each.
JGB BONDS TUMBLE
The ECB is widely expected to leave interest rates at 4.25 percent on Thursday, given its concerns over inflation, though it is also expected to issue a new set of staff economic projections.
The euro held steady at $1.4490 against the dollar ahead of the meeting, near an eight-month low of $1.4385 the prior day.
The attention in currency markets was also on the besieged South Korean won which surged nearly 2 percent to 1,128.6 per dollar to snap a four-day losing streak, as several dealers reported authorities selling dollars to lift the local currency.
The won had dropped nearly 6 percent over the past four sessions — on fears a possible mass capital flight could put the country's financial system in danger.
But if there is one relief for investors on the inflation front is the drop in oil prices, which are now far below the record above $147 hit in July.
U.S. crude dipped 18 cents to $109.18 on Thursday amid expectations for slowing global demand and signs the U.S. oil sector would recover quickly from Hurricane Gustav, which had a less devastating effect on the U.S. Gulf coast than feared this week.
Though economic uncertainty usually lift bonds, due to their perception as a safe haven, Japanese government bond futures tumbled on Thursday with traders citing selling by foreign funds in a move exaggerated by thin trade.
September 10-year futures plunged as much as 1.02 point to 137.33 and was last at 137.50, as traders suspect that hedge funds sold a large amount of futures abruptly, possibly doe to the lead contract's roll next week.
