GLOBAL MARKETS-Stocks set for biggest drop in 2 mths, euro falls

Mon May 16, 2011 1:56am EDT

* Dollar index up more than 4 percent in less than two weeks

* U.S. bonds, Japanese debt extend gains in early trade

* Japan, Australia stocks slip; Whitehaven plunges

* Oil, gold and silver weaken

By Saikat Chatterjee

HONG KONG, May 16 (Reuters) - Asian equities are on course for their biggest daily drop in two months and the dollar strengthened on Monday with further gains seen as renewed concerns of a possible euro zone debt restructuring prompted market players to reduce risk.

European shares are also expected to open lower, weighed down by the euro's weakness, according to financial spread bettors. [ID:nLDE74F03F]

Having gained by more than 4 percent in less than two weeks, the dollar extended its biggest winning streak against a basket of currencies this year, helped by violent swings in commodities and troubles in the euro zone.

The euro fell as low as $1.4063 , its lowest in six weeks, having dropped 5.9 percent from a 17-month peak of $1.4940 hit less than two weeks ago.

Cooling demand for risky trades was also evident in commodity markets and Asian currencies, which weakened while safe-haven assets like U.S. Treasuries and Japanese bonds advanced.

"Investors are risk-averse right now," said Jackson Wong, vice president of Tanrich Securities in Hong Kong. "Investors are unwinding their dollar carry trades, and it wouldn't be until probably next month that we see the dollar relenting."

Most stock markets in the region were in the red on Monday with Hong Kong and Jakarta leading losses as funds unwound their positions in resource-related stocks.

MSCI's index of Asia Pacific shares outside Japan was down 1.3 percent, extending a two-week decline and set for its biggest daily drop since mid-March.

Japan's Nikkei was down nearly a percent with banks among the main losers and Australia's benchmark index fell 1.2 percent.

Shares in Whitehaven Coal plunged as much as 14.5 percent and were trading down 13 percent after the firm called off a sale after a five-month auction failed to find a buyer at the right price.[ID:nL4E7GF0BK]

COMMODITIES, ASIAN FX WEAKENS

While some large bids in the euro are strewn around the $1.4050 to $1.4000 region, just below that, from $1.3900 to $1.4000, is also an area where stop-loss orders are said to be lurking, according to traders. [ID:nL4E7GF0CQ]

Even as euro zone officials scrambled to avert a fresh precipitation of the debt crisis, an unexpected complication for financial markets this week is the arrest on sexual assault charges of International Monetary Fund chief Dominique Strauss-Kahn. [ID:nN15215355]

A Greek official told Reuters that Strauss-Kahn's arrest "might definitely cause some delays in the short term," but would not change the IMF's policy on Greece. [ID:nN15241568]

A meeting of Eurogroup finance ministers, followed by an Ecofin meeting of EU finance ministers on Monday, could provide further direction for the euro.[ID:nLDE66D1JB].

Weighing on the euro has also been weakness in commodities with oil and gold softening after recent sharp volatility.

"The euro had been bought only because rising commodity prices were fueling expectations of more rate hikes in the euro zone. With commodity prices clearly running out of steam, there's no reason to buy the euro," said Daisuke Karakama, market economist at Mizuho Corporate Bank and a long-time euro bear.

Most Asian currencies also weakened with the Malaysian ringgit among the worst performers after central bank chief Zeti Akhtar Aziz said the country faced rising inflation risks.

China last week raised reserve requirements for banks while Indian state-run oil firms raised domestic petrol prices, indicating rising price pressures in the region. [ID:nL3E7GC2W4]

In bond markets, U.S. government bonds extended Friday's gains as investors' preference for safety pushed 10-year yields down to 3.16 percent from 3.23 percent on Thursday.

Ten-year Japanese bond yields dropped below 1.110 percent to the lowest since late November.[ID:nL4E7GG02N]

The dollar's strength chewed into oil's gains last week with U.S. crude futures CLc1 down nearly 1 percent on Monday below $99 a barrel. [ID:nL4E7GF0B4]

Gold and silver also edged lower.

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blogs.reuters.com/hedgehub (Additional reporting by Clement Tan, Masayuki Kitano and Krishna Kumar; Editing by Matt Driskill)

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