* BOJ cuts interest rates to 0.1 pct, to buy commercial
paper
* 10-year Japan government bond yield lowest since July 05
* US dollar remains under pressure, oil languishes under
$40
(Recasts, updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Dec 19 (Reuters) - The dollar fell further on
Friday, setting it up for its biggest weekly decline since
1985, while Japanese government bonds climbed after the Bank of
Japan cut rates to near zero and offered a grim economic
outlook.
Major European stock markets were expected to open as much
as 1.4 percent lower, according to UK financial bookmakers,
hurt by commodity-related shares.
The benchmark 10-year Japanese sovereign debt yield fell to
its lowest since July 2005, after the Bank of Japan said it
would greatly expand the types of both long-term and short-term
debt it buys outright to ease persistently tight lending
conditions.
The global economic slowdown has accelerated into the end
of this painful year, forcing policymakers to adopt
unconventional means to support their economies. Both Japan and
United States are in recessions that are unlikely to end soon.
"The economy is worsening very quickly and the BOJ and the
government will need to keep working closely. But there is
still no guarantee that announced steps will be able to stop
the economy from collapsing," said Hideo Kumano, chief
economist with Dai-Ichi Life Research Institute in Japan.
The dollar remained under pressure after the Fed indicated
this week it has embarked on quantitative easing, in which the
financial system is immersed with cash in an effort to revive
lending, usually when interest rates are at or near zero.
Prospects of an oversupply of dollars on the market and the
belt-busting U.S. fiscal deficit has made dealers dump the
currency, creating a potentially big impact on Asian central
banks, exporters and companies with dollar-based revenues.
The euro was up 0.3 percent at $1.4255 <EUR=>, after
surging overnight to a near three-month high of $1.4720 on
trading platform EBS. The euro has gained a stunning 20 cents
in the last month as the euro zone's interest rate advantage
was expected to hold for a while longer.
The dollar was down 0.5 percent to 88.95 yen <JPY=> and
fell as low as 87.13 yen, its weakest in more than 13 years, on
Wednesday.
"When it comes to dollar/yen, it has not been heavily
influenced by the domestic developments," said Thomas Lam,
senior treasury economist with United Overseas Bank in
Singapore. "Dollar/yen has responded to external
developments. It is a function of risk perception."
The trade weighted dollar <.DXY> is down 4.6 percent this
week, heading for its biggest weekly fall since September 1985,
according to Thomson Reuters data.
DEPRESSED COMMODITIES
A synchronised deep recession spanning developed economies
around the world has hit emerging markets hard as well, sharply
reducing raw material needs and hitting prices of everything
from copper to crude. Copper prices on the London Metal
Exchange tumbled to the lowest in four years on Thursday.
U.S. crude for January delivery fell as low as $35.98 a
barrel on Thursday, the lowest since June 2004, despite a
record supply cut agreement by OPEC. Oil ticked up to $36.50
<CLc1> on Friday though is down a staggering 62 percent this
year.
Asian stocks were set to end of the last full trading week
of 2008 with a whimper.
The MSCI index of stocks in the Asia-Pacific region
excluding Japan <.MIAPJ0000PUS> slipped 0.5 percent. The index
plunged 52 percent in 2008, easily the biggest annual decline
since the gauge was launched in its current form in 1988.
The Nikkei share average in Japan fell 0.9 percent <>,
trimming some losses after the Bank of Japan cut borrowing
costs.
Shares of Toyota Motor Corp <7203.T> fell 2 percent after
Japanese media said the world's biggest automaker would likely
post its first annual operating loss since the company was
founded more than 70 years ago.
In Hong Kong, HSBC shares <0005.HK> lost 4.7 percent on
fears Europe's largest lender could raise capital or cut its
dividend to keep its balance sheet intact. The Hang Seng index
<> fell 1.5 percent and led the region lower.
Asia had not able to escape a global slowdown that
accelerated following a shakeup in the structure of Wall Street
banks and a sudden pullback in China's economic growth.
Longer-dated U.S. government bonds edged lower, as dealers
squeezed what profits they could from a treacherous year for
trading. However, the Fed's plan to lower borrowing costs by
buying late maturity Treasuries and government-sponsored agency
securities could support prices in the near term.
The benchmark 10-year yield <US10YT=RR>, which moves
inversely to the price, was at 2.09 percent after falling as
low as 2.04 percent overnight, the lowest since the 1950s.
The yield has slumped around 200 basis points in 2008, with
the lion's share happening in the last month.
The benchmark 10-yr Japanese government bond yield dropped
to 1.21 percent, the lowest since July 2005, after the Bank of
Japan cut rates to 0.1 percent from 0.3 percent.
(Additional reporting by Xi Chen; Editing by Anshuman Daga)
