Asian shares fell and commodities slipped as the dollar spiked to a three-month high against the yen following Japan's intervention, prompting investors to book profits after last week's rally.
The dollar rose more than 4 percent against the yen to above 79 yen, hours after briefly falling to a record low of 75.31 yen. The dollar index <.DXY> as measured against six major currencies rose 1.3 percent.
Japanese Finance Minister Jun Azumi said Japan intervened unilaterally in the foreign exchange market on Monday to counter speculative moves that did not reflect the health of the Japanese economy.
U.S. crude futures also fell more than $1 as a stronger dollar made commodities priced in the U.S. currency more expensive for investors holding other currencies, thereby reducing demand.
The dollar's rally sent gold down more than 1 percent and silver down more than 2 percent.
The Nikkei <.N225> ended down 0.7 percent at 8,988.39, but still logged a monthly gain of 3.3 percent. Investors locked in profits on concerns the yen won't stay down for long.
The yen's persistent strength has raised worries about Japanese companies' earnings. <.T>
The dollar has come under pressure as investors cautiously returned to riskier assets after Europe laid out a basic framework to tackle its debt crisis last week.
A weak dollar, short-covering and an overbought market since the beginning of October was enough to trigger a correction (as the dollar spiked), said Colin Bradbury, Daiwa Capital Markets' regional chief strategist for Asia ex-Japan.
After rallying strongly to technically overbought territory, the markets were ripe for profit taking, he said.
MSCI's broadest index of Asia Pacific shares outside Japan slid 1.7 percent on Monday, after posting its best week in nearly three years as a long-awaited plan to resolve the European debt crisis sparked a huge relief rally.
Despite the steep falls, the index was set to end October up more than 12 percent for its best monthly gain since May.
Hong Kong's benchmark Hang Seng index <.HSI> was down 1.14 percent while the mainland's Shanghai Composite <.SSEC> fell 0.7 percent as investors locked in gains. But both indexes were set for their biggest monthly gains in 2-1/2 years on signs Beijing is selectively relaxing its tightening campaign.
The Singapore dollar and South Korean won fell on Monday as investors covered dollar-short positions with their central banks suspected of intervening, which caused reluctance to buy emerging Asian currencies.
Last week, emerging Asian currencies rose as investors added risk assets after Europe's debt deal. The won breached a technical resistance line to indicate more appreciation in the local currency.
It became more difficult to short dollar/Asia here, especially after suspected intervention from most of Asia, said a Singapore bank dealer.
Copper also fell on a firmer dollar but was set for its biggest monthly rise since December.
Investors are taking a wait-and-see attitude ahead of the slew of data this week, said CIFCO Future analyst Zhou Jie. There wasn't particularly good news out of the euro zone this weekend, nor evidence of the anticipated monetary loosening in China yet.
Events this week include monetary policy meetings by the European Central Bank and the U.S. Federal Reserve, as well as the G-20 summit, with focus on any coordinated efforts to help stabilize global financial markets.
Among key data due this week were China's purchasing managers' index, as well as U.S. ISM manufacturing and jobs data, with investors looking for clues on the state of the economy at the world's two biggest economies.
The momentum for risk appetite remains intact and the pressure on the dollar is expected to stay while the market shifts its focus from Europe to U.S. data and the Fed, said Junya Tanase, chief strategist at JPMorgan Chase in Tokyo.
The follow-through buying of equities around the world after the European summit suggests there were other factors supporting sentiment, such as expectations for more U.S. easing, hopes the U.S. economy and corporate earnings will not be too bad, he said.
Tanase said if data this week fails to suggest clear risks of a hard landing in China or a U.S. recession, the risk-taking momentum will continue.
MSCI's all-country world stock index hit its highest level in nearly three months and posted its best week since July 2009 on Friday.
U.S. stocks in October were on track to be the best month since 1974, supported by strong earnings. Merck & Co Inc
The CBOE Volatility index VIX <.VIX> -- a 30-day risk forecast of volatility in the S&P 500 -- fell on Friday to its lowest in nearly two months.
EURO NOT OUT OF WOODS
The euro fell 1 percent on Monday as the dollar rallied on Japanese intervention.
The single currency reached a seven-week high around $1.4247 last Thursday, and looked set to end the month up nearly 5 percent for its best monthly performance in just over a year. But uncertainty about a possible interest rate cut on Thursday by the ECB could limit its upside for now.
A weak sale of Italian bonds on Friday also underscored fragility of the euro zone's debt progress. The 10-year yield gap between Italian and German bonds widened after the auction to 378 basis points, about 10 bps wider on the day.
Italy paid record high cost of more than 6 percent to borrow on the debt market.
The head of EFSF, Klaus Regling, in Asia on a tour for potential investors, said on Monday he had been reassured by Japan's top currency official Tokyo would continue to buy its bonds. Last week, he played down hopes for a quick deal with China for its support behind efforts to resolve the crisis.
Asian credit markets weakened, reflecting fragility of risk appetite. The spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, widened five basis points on Monday.
(Additional reporting by Umesh Desai in Hong Kong; Jongwoo Cheon in Singapore and Carrie Ho in Shanghai; Editing by Kavita Chandran)