By Kevin Plumberg
HONG KONG, June 5 (Reuters) - Asian stocks fell on Thursday
as worries that persistent global inflation will require higher
interest rates, even as banks grapple with a credit crisis,
overshadowed a 3-day decline in oil prices.
The U.S. dollar rose to the highest against the euro since
May 12 on hopes the U.S. Federal Reserve may be more inclined
to raise interest rates to fight inflation than to cut rates to
spur growth.
Fed Chairman Ben Bernanke for the second time this week has
startled markets with his candor about price pressures in the
world's largest economy, saying on Wednesday that rising
long-term inflation expectations were a "significant concern."
That set the stage for the European Central Bank, which
meets to set policy later on Thursday. The ECB is widely
expected to keep its benchmark interest rate unchanged in the
face of sluggish growth, though inflation in the euro zone is
running near record highs.
By 0200 GMT, Japan's Nikkei share average <> was down
1.2 percent, pulled lower by industrial robot maker Fanuc Ltd
<6954.T>. However, the index is only about 180 points shy of a
5-month high hit on Monday.
The MSCI index of Asia-Pacific stocks outside Japan fell
0.8 percent <.MIAPJ0000PUS>.
Stocks in Malaysia were the biggest decliners in Asia, with
the Kuala Lumpur composite index tumbling 2.7 percent <>,
the largest one-day drop in 12 weeks, after the government
revamped its energy price system because of its deteriorating
fiscal position, raising diesel prices by 63 percent.
"The fear is setting in that inflation either destroys
consumer spending now, or induces panic tightening by central
banks, destroying growth later. Either way, equities are
supposed to lose from inflation," said asset allocation
strategists with JPMorgan, referring to emerging markets.
"Bonds react much faster to inflation and this is another
argument to be outright short in bonds, especially in emerging
markets," they said in a research note.
Benchmark yields of U.S. Treasuries <US10YT=RR>, which move
inversely to the prices, were a bit lower after jumping
overnight on Bernanke's comments on inflation.
The 10-year JGB yield <JP10YTN=JBTC> crept up to 1.745
percent compared with 1.740 percent on Wednesday, but has been
largely stable this week. Futures rose, with investors focusing
more on events this week in the U.S. financial sector that have
revived concern the credit crisis is still not over.
The credit ratings of three major U.S. investment banks
were downgraded, which along with reports that Lehman Brothers
<LEH.N> was seeking up to $4 billion in capital touched a raw
nerve in the market, sending financial shares lower in many
markets.
"Market sentiment is skittish as investors wait for U.S.
banks' results this month." said Kim Seung-han, a market
analyst at CJ Investment & Securities. "Eyes will be on the
extent of their losses."
The U.S. dollar was on course for a fourth day of gains
against the yen, up 0.2 percent to 105.45 yen <JPY=>.
Perceptions that the U.S. central bank is getting closer to
actually raising interest rates has helped lift the dollar in
the last few weeks.
On Tuesday, the dollar rose broadly after Bernanke in a
rare direct comment on the world's foremost reserve currency
said its weakness was helping to spur inflation.
Oil prices have been weighed by the recovery in the dollar.
The July U.S. light crude contract <CLc1> was down below
$122 a barrel on Thursday, off 10 percent from an all-time high
two weeks ago.
The price of gold <XAU=> in the spot market, which has
followed oil lower, was around $877 an ounce, down 5 percent in
the last two weeks.
(Additional reporting by Park Jung-youn in SEOUL, Editing by
Ian Geoghegan)
