Renewed worries about the slow progress in resolving the euro zone's debt crisis dampened investor appetite for risk, sending Asian shares and commodities lower on Tuesday while keeping pressure on the euro.
The switch to safety helped the dollar firm against six major currencies, although it slipped from Monday's three-month peak against the yen after Japan's record one-day intervention estimated by local media at as much as 10 trillion yen (80 billion pounds).
The euro came under renewed pressure amid growing doubts about the effective implementation of a plan agreed just last week to contain Europe's debt crisis, having lost all of the gains made in a run to as high as $1.4247 last Thursday after the debt deal was announced.
Greek Prime Minister George Papandreou has called an unexpected referendum on a new EU bailout deal for his debt-ridden country, while Italian bonds faced persistent selling pressure.
The depth and breadth of unanswered questions from Thursday's EU deal, the spectacle of euro-peripheral bonds yields/yield spreads mostly higher on Monday and general support afforded the USD from the BOJ's intervention, ensured EURUSD traded down in fits and starts throughout Monday, BNP Paribas analysts wrote in a note.
Traders said Asian stocks were generally ripe for profit-taking after a sharp rally last week on relief that European leaders had at least come to an agreement on a basic framework to help reduce Greece's huge debts, boost the region's bailout fund and strengthen banks.
A slightly weaker-than-expected pickup in China's factory activity as shown by official purchasing managers' index (PMI), which fell to 50.4 in October from September's 51.2, provided another excuse for selling, sending Hong Kong's benchmark Hang Seng index <.HSI> down 2 percent on Tuesday.
China's factory activity in October was its slowest since February 2009, reminding investors of the risks to the world's No. 2 economy from a sagging global backdrop.
The data sent risk-sensitive Australian dollar and the euro lower as well, but gold, perceived as a safe haven asset, was underpinned as other riskier assets slid.
The China data was disappointing, but it shows growth is continuing, although at a lower rate than previously expected, said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.
The pessimism in global markets that was prevalent 1-2 months ago was overdone and it is unlikely that the U.S. economy would fall into a double-dip recession, while a lack of specifics from last week's European meeting is a reminder that there was no once-and-for-all solution to Europe's problems, which will linger for 1-2 years, he added.
We may see a bit of underpinning in the fourth quarter. But caution will stay with us, and we expect quite sharp daily moves, Foster said, adding that the markets may fall 3-4 percent for a few days, but rather than continuing the downtrend, they may reverse course and rise.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 1 percent on Tuesday, after ending October up more than 12 percent for its best monthly gain since May, helped by last week's huge rally on a long-awaited plan to resolve the European debt crisis.
MF GLOBAL REMINDS
The MSCI world equity index <.MIWD00000PUS> dropped 2.4 percent on Monday, pulling back from its highest levels in nearly three months hit last week, but gained 10 percent in October for its biggest one-month rise since April 2009.
U.S. stocks fell as the spike in the U.S. dollar weighed on commodity prices, sending the Standard & Poor's 500 Index <.SPX> down 2.47 percent on Monday. Despite the losses, it posted its biggest monthly percentage rise since December 1991.
U.S. futures broker MF Global Holdings Ltd
The collapse of MF Global forced a scramble to untangle trading positions, putting a brake on trading activity in U.S. gold, crude oil and grain futures on Monday.
Some analysts said such unwinding of trading positions could intensify selling pressures and weigh on broad markets.
Gold rose 0.5 percent on Tuesday after losing nearly 1 percent the day before on a firmer dollar, while oil slipped.
Asian credit markets weakened on Tuesday, as renewed worries about the European debt woes and rising Italian bond yields led to a sharp widening of the spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning. The spread widened by 14 basis points from Monday.
Italian 10-year government bond yields rose back above 6 percent on Monday to levels last seen in August, before the European Central Bank stepped in to buy Spanish and Italian debt in the secondary market.
U.S. Treasuries soared on Monday, with 30-year bonds posting their best day since the Federal Reserve announced its first massive stimulus programme in March 2009, while the yield on benchmark 10-year notes fell to 2.12 percent from 2.32 percent late Friday.
(Additional reporting by Ian Chua in Sydney; Editing by Ramya Venugopal)