(Updates prices with close of Japanese stock market, changes
byline)
By Kevin Plumberg
HONG KONG, May 22 (Reuters) - Record high oil prices at
$135 a barrel deepened worries about inflation on Thursday and
weighed on some Asian stocks although Japanese shares ended
slightly higher, as dealers trimmed their bets on further
weakness.
The dollar trudged higher against the euro after earlier
hitting a 1-month low after the Federal Reserve slashed its
U.S. 2008 growth forecast, warned of higher unemployment and
raised its inflation predictions, weighing on government bond
prices.
European stocks dropped in early trade on Thursday in a
broad retreat, falling for the third session in a row on
inflation fears after a gloomy outlook by the Federal Reserve.
By 0715 GMT, the FTSEurofirst 300 <> index of top
European shares was down 0.4 percent at 1,334.83 points.
Minutes from the Federal Reserve's April 29-30 policy
meeting warned of mounting concerns over inflation, making
further interest rate cuts unlikely at a time when the U.S.
economy may be in a recession and oil prices have risen 40
percent so far in 2008. []
"The Fed is in a difficult position now because it's not
the U.S. economy that is driving inflation but the Chinese,"
said Damien Boey, equity strategist at Credit Suisse First
Boston in Australia.
"So we end up with the situation where rather than
inflation being a sign of strong demand, inflation actually
eats into the consumer purchasing power."
Tokyo's Nikkei average <> closed 0.4 percent higher,
or 52.16 points, at 13,978.46. Asia stocks outside of Japan
declined 0.6 percent to 491.89, according to the MSCI index
<.MIAPJ0000PUS>. The index has fallen for the third straight
day.
The oil surge favoured energy firms such as Nippon Oil
<5001.T>, which rose 4.87 percent, but sent fuel-dependent
airlines into a tailspin. Cathay Pacific <0293.HK> slid 1.935
percent, Qantas <QAN.AX> dropped 4 percent and Korean Air
<003490.KS> fell 4.5 percent.
Investors, however, shunned Japanese government bonds,
which slipped after three days of gains because of the mounting
inflation threat from escalating oil prices.
"We are moving away from stagflation to inflation," said
Freddy Lim, chief Japan fixed-income strategist at Morgan
Stanley. "The better the Fed is at forestalling a further
crisis, the worse it is for inflation. People are talking about
this a lot and are very concerned."
STAGFLATION
After rising to a high above $1.58, the euro <EUR=> slipped
0.2 percent to $1.5767. Against the yen <JPY=>, the U.S. dollar
was relatively unchanged on the day at 103.08 yen.
Many analysts viewed the dollar's small comeback as
short-term in nature and expected more weakness in the days to
come as a result of the Fed's grim picture of rising price
pressures and stagnant economic growth.
"The dollar is under significant pressure as the market is
now contemplating a stagflationary scenario, as opposed to
higher rates under more stable growth conditions," said
Geoffrey Yu, currency strategist with UBS in Zurich.
The dollar's weakness only added to the appeal of crude oil
<CLc1>, which powered to a fresh record of $135.04 a barrel.
"The huge draw in crude inventories was surprising. All
focus is on bullish factors. You simply have to follow the
trend and buy now," said Tatsuo Kageyama, an analyst at Kanetsu
Asset Management in Tokyo.
The strong demand for oil and fear of inflation has spurred
buying of gold <XAU=>, which climbed above $935 an ounce for
the first time in a month. Gold rose to a record $1,000 in
March as equity markets around the world slumped but it fell
back below $850 after the panic subsided.
BUFFETTED
Fretful investors got little comfort from Warren Buffett,
the world's richest person, who said that economic pain was
likely to run for a while longer and could get worse.
"I think the tidal wave that hit various financial
institutions since last August has largely been recognised and
felt," Buffett told a news conference in Madrid at the end of a
European tour.
But he said that for banks at least the worst was probably
behind them after the Federal Reserve staved off "really
contagious financial panic" with its intervention to prop up
investment bank Bear Stearns <BSC.N>.
"In terms of the effect on the economy in the United
States, we don't know, but I think it will be longer and deeper
then many people do. There could well be a lot to come."
Prices for 10-year Japanese government bond futures
<2JGBv1> were down 44 basis points to 135.42 after a
disappointing Bank of Japan buying operation flushed unwanted
bonds into the market.
The yield on the benchmark 10-year Japanese government
bond, which moves inversely to the price, was up to 1.66
percent, compared with 1.605 percent on Tuesday.
U.S. Treasury debt prices also slipped, with the 10-year
note down 3/32 for a yield of 3.82 percent <US10YT=RR>.
