* Crude under $109 after storm weakens before landfall
* Korea won plunges despite government calls for calm
* MSCI pan-Asia stocks index at 2-year low
(Updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Sept 2 (Reuters) - The U.S. dollar hit a 7-month
high against the euro on Tuesday, boosted by a slide in oil
prices to below $109 after a storm threat weakened and rife
political and economic uncertainty in Thailand and South Korea.
Asian stocks fell to a 2-year low, led by sharp losses in
Japanese stocks, where confusion reigned about the country's
leadership. European stocks opened weaker.
Deteriorating economic growth prospects and public unrest
in parts of Asia continued to take a toll on the region's
political establishment. Japan's unpopular prime minister
resigned late on Monday and a state of emergency was declared
in Bangkok, which weighed on the baht currency.
The South Korean won dropped to a 4-year low against the
dollar, even though the government warned it had the ability to
stem the currency weakness, with investors concerned about a
flight of capital from Asia's fourth-largest economy. Equity
markets fell to an 18-month low amid talk of a looming crisis.
[]
The sharp economic slowdown that began in the United States
and hit developed markets in Europe and Japan now appeared to
be tightening its hold on emerging markets.
"Political uncertainty in Asia is dollar supportive by
default," said Sharada Selvanathan, currency strategist at BNP
Paribas in Hong Kong.
"Global growth is slowing which is hurting exports,
inflation remains persistent, central banks need to raise
interest rates -- but the last thing a government about to fall
wants is higher interest rates. It's a vicious cycle," she
said.
The euro fell more than 0.5 percent to about $1.4515
<EUR=>, its lowest since February.
The British pound fell 0.7 percent to $1.7877 <GBP=>, after
earlier falling as low as $1.7850 -- its lowest since April
2006 -- on worries about the economic outlook.
Sterling has weakened by about 20 cents since end-July, a
stunning pace for a member of the Group of Seven rich nations.
Oil, meanwhile, fell below $109 a barrel <CLc1>, easing on
news that Hurricane Gustav had been downgraded to a tropical
storm after slamming into the U.S. Gulf Coast. Oil is down
about $3 from late Monday trade and has fallen $7 since Friday.
The governor of the state of Louisiana said Exxon Mobil
Corp <XOM.N> and Shell Oil Co <RDSa.L> were both expected to
ask for supplies from the U.S. emergency Strategic Petroleum
Reserve.
STATE OF EMERGENCY
Investors have taken refuge in the dollar, shying away from
slowing economic growth in Southeast Asia and, in particular,
political uncertainty in Thailand.
The dollar rose 0.4 percent against the Thai baht to 34.42
<THB=TH> after the Thai prime minister declared a state of
emergency in Bangkok and gave the army control to quell
long-running protests.
"The baht is obviously under pressure today because of the
political troubles in Thailand -- and more specifically today's
escalation in tensions," said Callum Henderson, head of foreign
exchange strategy with Standard Chartered Bank in Singapore.
"However, the economic backdrop is not exactly constructive
either. Growth is slowing and inflation -- judging by the last
number -- is starting to come off again."
Central banks in Thailand, Malaysia and Indonesia were all
suspected of stepping into the currency market to defend their
falling currencies, dealers said.
Australia's central bank cut its key interest rate to 7
percent, the first reduction in seven years. The Australian
dollar <AUD=> initially rose as central bank comments were not
as dovish as expected, but soon fell back. []
Japan's Nikkei share average <> ended down 1.8 percent
at a 5-month low, with shares of companies in the technology
sector being hit hard for a second day.
Investors were grappling with the implications of the
resignation of Prime Minister Yasuo Fukuda, the second Japanese
leader to resign in less than a year, threatening a policy
vacuum as the economy hangs on the brink of recession.
[]
South Korea's benchmark KOSPI stock index <> was down
0.5 percent at the lowest since March 2007.
The country's worsening balance of payments has made
investors nervous that foreign investors holding nearly $7
billion of government bonds due to mature next week will
repatriate the proceeds rather than reinvest them.
The MSCI pan-Asia equities index <.MIAS00000PUS> fell 1.3
percent to its lowest since July 2006, while an index of
Asia-Pacific equities outside Japan <.MIAPJ0000PUS> slid 0.6
percent to an 18-month low.
Irene Cheung, head of Asia local markets research for ABN
AMRO in Singapore, said the $1 trillion of capital that has
flowed into Asia since 2001 is now at risk of trickling out of
the region.
South Korea, Indonesia, Malaysia and even China could see
outflows because of local currency weakness, further tightening
of global liquidity and economic deterioration.
"We note the risk of a potential reflow of capital out of
Asia, not just on the back of a dollar rebound but also growing
pressure among global banks to repatriate capital toward (the)
year end," she said in a research note.
