Asian stocks slip as dollar outlook gets muddy

HONG KONG-(Reuters) - Asian stocks hovered near a 28-month high on Tuesday and the dollar steadied after a steep decline, with debate about the outcome of the next Federal Reserve meeting clouding the near-term outlook.

Major European stock markets opened a touch weaker, with the FTS Euro first 300 .FTEU3 index down 0.1 percent.

After no major policy initiatives emerged from a Group of 20 finance ministers meeting over the weekend, investors had kept selling the dollar on expectations that further asset-buying from the Fed will lead to debasement of the U.S. currency.

Fed officials, however, have not been uniform in their comments about “QE2,” leading to some doubts in markets about how big such a program will be. Kansas City Fed President Thomas Hoenig even called more asset buys by the central bank a “very dangerous gamble.”

Expectations of more cheap money flooding the financial system have been pushing up global equity and commodity prices, which briefly hit a 27-month high on Tuesday before falling.

The euro was down 0.1 percent at $1.3950 after rising as high as $1.4080 overnight.

The dollar was largely unchanged at 80.71 yen, close to a 15-year low of around 80.40 yen and not far from a record low of 79.75 yen last plumbed in April 1995.

Japan’s finance minister Yoshihiko Noda said he was watching the market “with great interest” and the government would “act decisively” if needed -- language similar that used by Tokyo in the build-up to last month’s intervention.

One trader said a fall in the dollar to below 79.75 yen could be the catalyst for further intervention, but others said Japan will probably wait for the outcome of the Fed’s November 2-3 meeting, before taking any action.

A further decline in the dollar against the yen is likely to meet support at 80.40 initially and then 80.15, although a move further down to 79.75 is not expected in the near term.

COMPETITIVE DEVALUATION

Markets increasingly believe G20 signals against competitive devaluation will make it tough for Tokyo to intervene, and verbal warnings alone are unlikely to keep the yen from breaking above record high.

G20 finance ministers pledged at the weekend to move toward market-determined exchange rates and commit to a variety of policies to reduce excessive external imbalances.

The MSCI index of Asia Pacific stocks outside Japan slipped 0.3 percent .MIAPJ0000PUS but remained close to a 28-month high hit last week.

Some analysts warned against chasing Asian stocks.

“While not yet expensive, Asia is trading at a premium to the rest of the world on both a price to earnings basis and in terms of price to book value,” said Andrew Pease, chief investment strategist, Asia Pacific, with Russell Investments in Sydney.

“But with QE likely to support equity markets globally, now is not the time to be underweight the region either,” he added.

The MSCI Asia Pacific ex-Japan index is trading at 12.66 times estimates of earnings 12 months forward, only slight below its 5-year average of 13.21 times, Thomson Reuters I/B/E/S data showed.

The MSCI’s emerging market stocks benchmark index .MSCIEF was up 0.13 percent at 2:30 a.m. ET, while the dollar was down 0.05 percent against a basket of currencies .DXY.

A slew of earnings due shortly has helped keep focus on Asian stocks, but the Singapore stock exchange’s (SGXL.SI) $8.3 billion takeover of Australia’s ASX Ltd  faced a hurdle after key political leaders voiced concern over the deal and hinted they may oppose it in parliament.

SGX stock was up 0.3 percent after falling 6.2 percent on Monday.

Australia’s Greens Party, which holds the balance of power in the upper house Senate, said it had strong concerns about the deal and may not support lifting the ASX’s 15 percent ownership cap.

Shares of Sony Corp rose nearly 3 percent for a while as traders cited media reports speculating that the Japanese electronics maker could be a potential acquisition target of Apple Inc.

Helping to spark interest was a Saturday report in Barron’s that said Apple could be contemplating a big acquisition and noted speculation of Adobe, Sony or Disney as potential targets.

Elsewhere, U.S. light sweet crude oil was down 0.29 percent, to $82.27 per barrel while gold was up 0.09 percent.

Commodities prices largely remained tied to the fate of the dollar. Since June, the rolling 90-day correlation between the U.S. dollar index and the Reuters-Jefferies CRB .CRB index of 19 commodities has been between -0.83 to -0.95, showing that when one rises the other will very likely decline.

A continued rebound in the dollar will probably keep a lid on gold and copper.