Korean artillery exchange and Irish debt hit markets

Singapore (Reuters): The dollar rose broadly, U.S. Treasuries gained and European and Asian shares and U.S. stock futures fell on Tuesday after a major exchange of artillery fire on the Korean peninsula.

The euro and commodities also dropped as a bailout for debt-soaked Ireland failed to allay fears of a wider euro zone crisis.

North Korean artillery fired dozens of shells onto a South Korean island near their disputed sea border, killing one marine, setting fire to buildings and prompting a return of fire by the South, Seoul’s military and media reported.

“The market was already quite nervous given the failure of the Irish bailout package to calm sentiment toward other peripheral countries,” said Mirza Baig, senior currency strategist with Deutsche Bank in Singapore.

“Bad news on geopolitics may add fuel to this trend toward position-squaring.”

Seoul’s financial markets closed as news was still filtering through but international markets reacted, with the dollar up 0.4 percent on the day against a basket of currency. The dollar index .DXY rose from 78.77 before the reports to a session high of 79.12.

U.S. 10-year Treasury futures, a traditional safe haven, were up 0.4 percent on the day and U.S. S&P 500 stock index futures were down 0.9 percent. Gold, another safe haven, reversed earlier losses to jump to a one-week high.

The Korean won tumbled in offshore markets and the yen eased.

European markets, which financial bookmakers had been calling flat before the Korean news broke, opened down, with the FTSEurofirst 300 .FTEU3 down 0.4 percent, Britain’s FTSE 100 .FTSE down 0.6 percent and France’s CAC .FCHI down 0.7 percent. .EU

As Beijing tightens monetary policy to rein in inflation, worries of faltering Chinese demand for raw materials -- in the short term at least -- knocked metals prices and were another factor hammering shares, particular in resource-focused Australia.

“Investors seem unable to move beyond European debt contagion fears and concerns of further China policy tightening,” said IG Markets strategist Ben Potter.

The euro had initially spiked on Monday on news of a European Union and International Monetary Fund bailout for Ireland, where a property bust has pushed the nation’s banks to the brink of collapse and blown a hole in the public finances.

But it swiftly reversed course as the coalition government in Dublin, deeply unpopular after presiding over the implosion of an economy dubbed the “Celtic Tiger” for its double-digit growth in the late 1990s, looked to be facing a struggle to pass an austerity budget that is a condition of the aid.

The single currency was driven back below $1.36 on Tuesday as the Irish turmoil stoked fears that a crisis that has already engulfed Greece will spread to other indebted euro zone nations, with Portugal and Spain in nervous bond investors’ sights.

“They’ve addressed the Greek problem, they’re addressing the Irish problem, people are now questioning where is the next one ... the political turmoil in Ireland also doesn’t help,” said Grant Turley, strategist at ANZ in Sydney.

Asian stock markets that were still trading when the Korean news broke extended the day’s losses, pushing MSCI’s index of Asia Pacific shares outside Japan .MIAPJ0000PUS down 2.2 percent. Tokyo markets were closed for a holiday.

Shares in Hong Kong .HSI and Mumbai .BSESN fell more than 2 percent.

Australian shares .AXJO, which closed earlier, lost 1.2 percent to hit a seven-week low. Banks and miners led the retreat, with National Australia Bank (NAB.AX) down 1.8 percent and BHP Billiton (BHP.AX) off 1.7 percent.

On Monday U.S. financial stocks had slid on fears of exposure to Europe’s debt woes and concerns about a broad insider trading probe. The KBW bank index .KBX fell 1.5 percent and JPMorgan Chase & Co (JPM.N) fell 2.3 percent. .N

The euro traded around $1.3565, below Monday’s session trough of $1.3574. The single currency had risen as high as $1.3786 on Monday.

“The fact that sentiment turned so quickly, that the Irish government is heading toward an election and that Moody’s talked about downgrading Ireland are all not helping,” said Greg Gibbs, strategist at RBS.

“It reveals a lack of underlying demand for European sovereign and financial assets and point to the downside risk for the euro.”

Against the yen, the euro slipped to around 113.50 from two-week highs near 115.0 yen.

A stronger dollar often weighs on commodity markets, making assets priced in the U.S. currency more expensive for holders of other currencies.

U.S. crude oil futures lost 62 cents, or nearly 0.8 percent, to trade at $81.12 a barrel, gold fell around 0.5 percent and copper and zinc were also weaker.