* US 30-yr yield at record low, as hunt for return picks up
* OPEC cuts production, but crude still near 4-year low
* Eyes on Bank of Japan, with rate cut seen imminent
* Share markets gain on banks
By Kevin Plumberg
HONG KONG, Dec 18 (Reuters) - The U.S. dollar hit
2-1/2-month lows against the euro on Thursday, with investors
deterred by the world's lowest interest rates, while weak
energy demand due to the global downturn kept oil prices near
4-year lows below $40 a barrel.
Expectations that deep recessions from Britain to the
United States could lock their economies in a deflationary
spiral of falling prices and profits kept investors reaching
for longer-dated U.S. government bonds seeking both safety and
yield as a most difficult year winds down.
Japanese stocks edged up, led by bank shares as the
country's central bank kicked off a two-day meeting that many
economists say could produce a rate cut to follow the U.S.
Federal Reserve's historic cut in base rates to near zero on
Tuesday.
The dollar's uncertain prospects as the Fed engages in
quantitative easing -- when central banks overwhelm the
financial system with money to promote lending -- has spooked
dealers who had bets on further strength in the dollar. As a
result, they have rapidly liquidated their positions.
"2009 will be a very negative year for the dollar," said
Mitul Kotecha, head of global foreign exchange research with
Calyon in Hong Kong. "The risk is that we could see the dollar
weakening fairly sharply."
The Fed also said it would keep rates low for a while and
take unconventional measures to boost the U.S. economy,
including buying Treasuries and government sponsored-agency
debt to get market rates lower.
The euro rose to as high as $1.4456 on trading platform
EBS, the highest since late September, before easing back to
$1.4400, down slightly on the day <EUR=>.
Against the yen, the dollar climbed 0.6 percent to 87.75
yen <JPY=> after plumbing a 13-year low overnight of 87.13 yen.
The sustained drop below 90 yen, a psychologically
important level for the market, has sparked concern Japanese
officials could intervene to cap the yen's gains.
Japan's Finance Minister Shoichi Nakagawa said he would not
comment on whether the ministry would enter the market. The
stance was different from just a week ago when Nakagawa said
flatly he was not thinking about whether Japan should
intervene.
40 AND BELOW
The weakening dollar has not provided much support for oil
prices, which traded around $40 a barrel after U.S. crude for
January delivery fell as low as $39.19 earlier in the session,
the lowest since July 2004.
The Organization of the Petroleum Exporting Countries,
eager to build a floor under dipping prices, announced on
Wednesday it would cut 2.2 million barrels daily of output
starting Jan. 1, slightly more than expected.
However, instead of boosting prices, the planned cut
deepened a sense of gloom about global demand.
"Countries other than the Saudis are going to have
difficulty to comply with this cut. Those oil producing
countries, if they want to survive, have to produce, even at
$40 oil," said Tetsu Emori, fund manager at Astmax Co Ltd in
Japan.
"Prices have to head lower, now that we are through $40. As
long as demand continues to weaken, prices will weaken too."
U.S. Treasuries extended gains in Asia, particularly
long-dated maturities, pushing down the 30-year bond yield
<US30YT=RR> to a record low of 2.64 percent.
The benchmark 10-year yield <US10YT=RR>, which moves in the
opposite direction to the price, dropped further to 2.19
percent, the lowest in more than five decades. The yield has
plunged a stunning 166 basis points in the last month, as
investors crowd into the late maturities to squeeze out what
yield they can.
FOCUS ON BANK OF JAPAN
Asian stocks rose modestly, helped by property and bank
shares, on hopes policymakers will follow the Fed's lead and
cut rates with abandon to spur growth.
Japan's Nikkei average <> rose 0.9 percent, as shares
of big banks and brokerages rallied on growing expectations the
Bank of Japan will lower rates on Friday.
Japan's biggest bank Mitsubishi UFJ Financial Group
<8306.T> rose 2.3 percent, while second-ranked Mizuho Financial
Group <8411.T> climbed 2.8 percent.
The MSCI index of stocks in Asia-Pacific outside Japan
<.MIAPJ0000PUS> climbed 0.6 percent to a 1-month high, as some
foreign investors scooped up cheap shares.
Hong Kong's Hang Seng index <> was down 0.3 percent,
dragged lower by a 3.8 percent drop in HSBC <0005.HK> on fears
about dividend cuts and the potential need to raise capital to
weather rough times ahead.
Fund managers' views on China remained quite optimistic
because of its capacity for more rate cuts and fiscal stimulus
and the world's fourth largest economy was the preferred choice
of Asian equity investors, according to a Merrill Lynch survey.
However, the proportion of fund managers' portfolios
dedicated to emerging markets is at the lowest since 2001.
"It would now be a major surprise for global fund managers
if emerging markets were to outperform U.S. equities in 2009,"
said Michael Hartnett, chief emerging markets equity strategist
at Merrill, in a note.
