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The euro strengthened on Monday, though its gains appeared short-lived as major European powers continue to haggle over a fresh rescue package for Greece, while Asian stocks extended a seven-week losing streak on fears the global recovery is losing steam.
European shares were set to open broadly stable after Friday's selloff, according to financial spreadbetters.
Concerns over a sputtering U.S. economic recovery, slowing growth in China and India and festering problems in the euro zone pushed the MSCI index of Asia Pacific shares outside Japan down by nearly 1% to a 2-1/2 month low before regaining some ground to be 0.6% lower.
With the Federal Reserve's $600 billion bond purchase program set to expire by the end of June, investors have sought refuge in safe-haven assets like U.S. Treasuries even as politicians in Washington wrangle over extending its debt ceiling and the world's biggest economy lurches towards a technical default.
That kept the dollar near a one-week high against a basket of currencies and supported around 80 versus the yen, a day before a Bank of Japan meeting where it will consider expanding a loan program aimed at supporting certain industries, according to sources.
The euro edged higher after falling by nearly 2% last week, its worst weekly performance since mid-May. But its gains are expected to be limited by disputes among policymakers ahead of a meeting next week at which euro zone leaders are due to finalise a new rescue package for Greece.
It was up slightly at $1.4344 after dropping as far as $1.4285 on EBS in very early Asia trade and down from a one-month peak of $1.46966. Traders cited broad short-covering kicking in after players failed to chase the euro's early drop.
Ironically, the single currency's latest bout of weakness came after ECB President Jean-Claude Trichet last week signaled a July rate hike, an indication that market players are expecting fewer rate increases after that.
"The euro had been bought on hopes for rate hikes, but it seems like after the one that was signalled last week takes place in July, the next ones may not follow suit that quickly," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.
BEYOND QE2
As the Fed's bond purchase plan winds down to a close with its last purchase of $50 bln of Treasuries this week, investors expect stocks, bonds, gold and the euro to weaken subsequently, according to a Reuters poll of 64 analysts and fund managers last month.
The end of "Quantitative Easing 2", or "QE2" as it is more popularly known, could reduce the flood of money that has travelled to Asia in recent months searching for higher yields and forcing the region's central banks to tighten monetary policy.
Data from fund tracker EPFR Global showed emerging market bond funds received new weekly money totaling $1.4 bln up to June 8, an eight-month high. Hard currency bond funds attracted $726 mln, the highest in over three years.
Anticipating a slowdown in incremental flows, credit spreads widened slightly on Monday and Asian stocks traded on a weaker note though volume is expected to be subdued with holidays in Australia and before a slew of U.S. economic data this week.
The end of the final series of government bond purchases that marks the last phase of the U.S. plan launched in November 2010 does not mean the stimulus will come to a complete stop.
The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 bln to $16 bln per month.
Shares in Tokyo fell 0.7%, hurt by weak machinery data for April in a sign that reconstruction-related demand after Japan's massive March 11 earthquake has been slow to materialise.
Among the principal laggards on Monday were Chinese shares , which fell nearly a percent on concerns over the restructuring of local government debt and fears of further policy tightening to curb inflation.
The weakness in stocks helped bonds with yields on U.S. 10-year notes holding below 3%.
U.S. crude's front month futures was steady slightly below $99 a barrel and Brent was near $118.50 per barrel .
Spot gold steadied around $1,530 per ounce after slipping almost 1% in the previous session while silver was around the $36 line.
