Asian shares edged down on Tuesday as fears about the ability of politicians on either side of the Atlantic to tackle huge debt burdens sapped investors' confidence in the outlook for Western economies.
The dollar held gains near a 6-week high against a basket of currencies, with European banks scrambling to secure dollar cash as money markets seize up, and equity volumes were thin, indicating that risk aversion remained high.
There is no fundamental change in the markets' risk averse mood. There's been no clear progress in the euro zone, said Koji Fukaya, chief foreign exchange strategist at Credit Suisse.
Shares in China and Hong Kong were hit after central bank data showed Beijing may have sold foreign currency to prop up the yuan for the first time in four years in October, signalling rare capital outflows from the world's No.2 economy.
But European stocks were expected to claw back some of the previous day's losses, with spreadbetters calling the FTSE 100 to open up 0.7 percent. Germany's DAX was also seen up 0.7 percent and France's CAC-40 up 0.9 percent.
The failure on Monday of a super committee of U.S. lawmakers to reach agreement on a deficit-cutting plan was another blow to market confidence already hammered for weeks by Europe's inexorably worsening sovereign debt crisis.
U.S. stocks fell around 2 percent on Monday, following sharp falls in Europe, and commodities also slumped on concerns that the chances of a global recession are rising.
The S&P index has broken sharply lower and looks technically pretty dire, despite more OK data as the Chicago Fed index bounced slightly and the overhang of unsold homes dipped back to a lower but still high 8 months, said Kit Juckes, head of foreign exchange research at Societe Generale.
Investors' jangled nerves were soothed somewhat in Asia when Standard and Poor's and Moody's, two of the big three ratings agencies, said the deficit committee's failure would not trigger an immediate downgrade of the U.S. credit rating.
Japan's Nikkei share average opened down 1 percent, hitting its lowest level in 8 months, then pared losses to close down 0.4 percent.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.3 percent, putting it in negative territory for the sixth successive session.
S&P 500 futures rose 0.5 percent, pointing to a modest rebound on Wall Street.
The news that a congressional committee of six Republicans and six Democrats had abandoned their efforts to reach a deal on reducing the United States' ballooning deficit had been expected, but nonetheless reinforced investors' perceptions that Washington politicians are too divided to deal with the debt problem.
It came as the euro zone's crisis crept ever closer to the heart of the continent, with the risk premiums on Spanish, French, Italian and Belgian government bonds rising after Moody's warned that France's triple-A credit rating was under threat.
The tightening of credit conditions and pro-cyclical bias of fiscal policy means that the global economy is at serious risk of returning to recession when it has singularly failed properly to recover from the last recession, said Russell Jones, head of global rates strategy at Westpac, in a note.
Europe is already effectively there. But Japan and the U.S. are looking increasingly likely to follow suit.
Asian credit markets reflected the cautious mood, with spreads on the iTraxx Asia ex-Japan investment grade index, a gauge of risk appetite, widening by around 5 basis points.
The euro was steady around $1.35 and the dollar held firm after jumping on Monday. Ironically, the U.S. currency has been boosted by the debt worries because it remains investors' preferred safe haven in times of market volatility.
YEN DEMAND WEAKENS
But demand weakened for the yen, another safe-haven currency, which eased about 0.2 percent to around 77.05 to the dollar and about 103.90 to the euro.
In commodities markets, copper rose 1.4 percent after a three-day slide that had taken it close to its lowest levels in a month on worries that the darkening economic outlook would crimp industrial demand.
There were more modest rebounds for other commodities, with gold rising 0.3 percent to around $1,684 an ounce.
Oil steadied after the United States, Britain and Canada announced new sanctions against Iran's energy and financial sectors, ratcheting up pressure on OPEC's second largest producer to end its nuclear programme.
U.S. crude gained 0.2 percent to climb above $97 a barrel and Brent crude rose 0.5 percent to above $107 a barrel on fears the stand-off could ultimately lead to military action and a disruption of supplies.
Iran adds a risk premium to crude, said Jonathan Barratt, managing director of Commodity Broking Services. Depending on how the issue escalates, we may see $150 crude, which will have dramatic concerns especially as Western economies are trying to emerge from a slowdown.
(Additional reporting by Hideyuki Sano in Tokyo and Ian Chua in Sydney; Editing by Richard Borsuk)