By Jeremy Gaunt, European Investment Correspondent
LONDON, Sept 2 (Reuters) - Hurricane Gustav's fading winds
prompted a large selloff in oil to around $105 a barrel on
Tuesday, helping boost the dollar to 10-month high against major
currencies, while political risk shook emerging markets.
European stocks gained, but emerging markets fell to a near
18-month low on economic worries and concerns about Thailand
following Prime Minister Samak Sundaravej's declaration of a
state of emergency.
Oil was undergoing a relative rout, with the price of New
York crude <CLc1> down nearly $10 a barrel at $105.64, a level
last seen about five months ago.
A weakened Hurricane Gustav, now downgraded to a tropical
storm, spared major oil facilities in the U.S. Gulf.
"There is another month of peak hurricane season to go, and
there will be other threats," Michael Wittner, global head of
oil research at Societe Generale, said in a research note.
"However, the market reaction to Gustav has confirmed our
opinion that when the disruption threats fade, the underlying
factors (for oil) are bearish."
The fall combined with an ongoing trend to dump European
currencies on a souring global growth outlook, lifting the
dollar to a 10-month high against major currencies.
The dollar index <.DXY>, a gauge of its performance against
six major currencies, climbed around 1.2 percent to 78.075. The
euro slid 0.7 percent to below $1.45 <EUR=>.
Britain's pound also continued to get a drubbing on the UK's
poor economic outlook, falling 0.8 percent to $1.7863 <GBP=>.
"No one wants to catch a falling knife, and sterling is that
falling knife," said Divyang Shah, chief strategist at
Commonwealth Bank of Australia.
EMERGING SLIDE
The decline in oil prices and the euro's slide boosted
European exporters, lifting the FTSEurofirst 300 index <>
up around 0.7 percent.
But economic and political woes battered emerging market
shares.
Emerging stocks as measured by MSCI's benchmarket sector
index <.MSCIEF> fell to their lowest level since March 2007.
Thai Army chief Anupong Paochinda said he would not use
force to evict protesters occupying the prime minister's
official compound despite a state of emergency giving him the
power to do so.
Central banks in Malaysia, India and elsewhere in Asia
defended their weak currencies.
"Central banks are trying their best to stop the flood of
outflows," a trader in Singapore said.
In South Korea, where the won <KRW=> has been plumbing
multi-year lows, the authorities restricted their efforts to
meetings and warnings. The won dropped to a 4-year low against
the dollar with investors concerned about a flight of capital
from Asia's fourth-largest economy.
Euro zone government bonds were lower, with 2-year yields
<EU2YT=RR> rising to 4.093 percent and 10-years <EU10YT=RR> up
tp 4.183 percent.
(Additional reporting by Naomi Tajitsu)
