* Euro, Australia dollar sold as risk reduction resumes
* Focus on funding market stress, U.S. Treasuries rise
* Asia ex-Japan equities cheapest since March 2009
* Cutting risk overshadows fundamentals, valuations
By Kevin Plumberg
HONG KONG, May 26 (Reuters) - The euro slid on Wednesday,
with trade driven by fears that Europe's debt woes can wreak
havoc in its banking system, though Asian stocks edged up from
nine-month lows as value investors hunted for bargains.
Increasingly difficult financing conditions in the euro
zone, tightening U.S. banking regulation and escalating
tensions on the Korean peninsula have kept investors slashing
risk in their portfolios.
Wall Street rallied late on Tuesday to finish flat, briefly
pushing up U.S. stock futures. Yet, persistent selling of euros
and Australian dollars against the yen during early Asian trade
deflated hopes for a sustained shift in sentiment and cut the
gains in equities. [] []
"Doubts and caution pervade the market. There are doubts
whether southern European countries are the only ones with debt
problems," said Suh Dong-pil, a market analyst at Hana Daetoo
Securities in Seoul.
"Growing tensions with North Korea are also a negative."
The euro was down 0.7 percent on the day at $1.2285 <EUR=>,
creeping back down to a four-year low near $1.2140 hit on May
14. The euro is poised for its biggest monthly decline since
January 2009.
Against the yen, the euro was down 1.1 percent to 110.60
yen <EURJPY=R>, with support at 108.85 yen, an 8-1/2-year low
struck on Tuesday.
The Australian dollar fell 0.9 percent to $0.8210 <AUD=>,
on track for the biggest monthly decline since October 2008.
STRESSED OUT
Stress in funding markets has brought back painful memories
to the fallout from the Lehman Brothers failure in 2008.
The combination of a rush out of euros and into U.S.
dollars and fears that last weekend's takeover of a small
Spanish savings bank by the central bank might be a sign of
more widespread trouble have pushed up short-term U.S. dollar
financing costs.
Three-month dollar Libor fixed on Tuesday at 0.5362
<USD3MFSR=>, the highest since July 2009, having more than
doubled in the past three months.
A Reuters poll of money market traders showed the rate was
expected to rise to 0.70 percent over the next month.
[]
Japan's Nikkei share average rose 0.4 percent <> after
plumbing a six-month low on Tuesday, but was ultimately
dependent on the direction of the euro.
"We're likely to see short-covering and bargain-hunting
today, given how far the Nikkei fell yesterday," said Toshiyuki
Kanayama, a market analyst at Monex Inc in Tokyo.
"But there's still a lot of longer-term uncertainty and if
the euro turns volatile the way it was yesterday, things could
change."
The MSCI index of Asia Pacific stocks outside Japan was up
0.7 percent <.MIAPJ0000PUS>, helped by a bounce in
resource-related shares. Since peaking in the latest bull
market rally on April 15, Asian stocks have fallen 18 percent,
just short of a 20 percent mark usually defining a bear market.
The index was trading at 11.8 times earnings expected in
the next 12 months, the lowest since March 2009, Thomson
Reuters I/B/E/S data showed.
Valuations have also tumbled in Japanese, U.S. and European
equities to where they were at the start of the 2009 rally, but
with investors focused on broad economic and financial risks,
attractive prices may not be enough to support the market in
the near term.
Ten-year U.S. Treasury note futures <TYc1> were basically
flat, cutting earlier losses as equities retraced gains. The
cash market rose, with the benchmark 10-year yield at 3.1560
percent compared with Tuesday's intraday low of 3.0642 percent
<US10YT=RR>.
U.S. crude for July delivery rallied 0.8 percent to $69.29
a barrel, after a report of a bigger-than-expected decline in
gasoline inventories. []
(Additional reporting by Jungyoun Park in SEOUL and Elaine
Lies in TOKYO; Editing by Tomasz Janowski)
