The euro steadied on Thursday with a widely expected rate hike from the European Central Bank later being offset by a spreading sovereign debt crisis, while China's bank stocks bounced on hopes of a near-term pause in policy tightening.
The risks of sovereign debt default were still very much on the radar of global investors, though Wall Street finished higher overnight, as many looked beyond the latest bout of nervousness over the euro zone debt crisis after Moody's slash in Portugal's ratings sparked a selloff in peripheral bonds.
The sharp drop in the bonds of Portugal and Greece came just a week after Greece passed tough austerity measures needed to win a near-term bailout, thereby avoiding a default.
Greece and Portugal have raised the stakes for ECB President Jean-Claude Trichet and keep exposing the euro's biggest vulnerability. The central bank will probably lift rates for a second time this year to 1.5 percent but then pause for a few months as it battles a debt crisis and struggles to avoid an outright default.
On a relative basis, Europe is going to be suffering with a strong currency, higher interest rates, budget problems, austerity budgets, higher taxation. So you're going to have low growth in Europe, said Davis Hall, global head of FX and precious metals advisory at Credit Agricole Suisse's private client business.
Europe is going to need a weaker currency at some point... Which is why we think the euro is vulnerable and we are staying away, said Hall, who is bearish on the euro versus the Swiss franc and U.S. dollar.
SAMSUNG UNLEASHES TECH SECTOR BEARS
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.4 percent, near a one-month high reached on Monday that has been difficult to retest since then.
Gains were spread evenly across the financials, industrials and consumer-oriented stocks, while the technology sector was the only one in the red, pulled down by a 2 percent fall in shares of Samsung Electronics <005930.KS>.
Quarterly profit at Samsung, the world's largest maker of memory chips and televisions and a big favorite of foreign fund managers wanting exposure to the Asian tech sector, fell 26 percent, hurt by weak earnings at its flat screen unit.
Bank and insurer shares helped lead gains in Hong Kong as investors judged that the People's Bank of China is getting closer to taking a break from its multiple increases in policy rates and bank reserve requirements as the economy shows signs of losing steam.
For a speculative play you could say that Chinese banks have been beaten down on various concerns ... but I don't think those banks will go bust, Yonghao Pu, chief strategist of UBS Wealth Management in Hong Kong, told Reuters Television.
Sentiment (on Chinese bank stocks) is very bad, but for the short term I think you can speculate and buy some.
The Hang Seng index <.HSI> rose 0.5 percent, while the Hang Seng China Enterprises index of mainland stocks listed in Hong Kong was up 0.7 percent <.HSCE>.
Japan's Nikkei average <.N225> closed down 0.1 percent, ending a 7-day rally that pushed the index back to where it was right after March's devastating earthquake and tsunami. <.T>
OPTIONS TO AVERT U.S. DEFAULT
The euro was trading at $1.4315, smack in the middle of a range held over the past two months. It could be vulnerable should the ECB strike a dovish note later after a policy meeting or if the debt crisis brings countries such as Greece and Portugal closer to default.
However, with Congress still not close to agreeing to lift the ceiling on government borrowing, the possibility of a U.S. debt default has loomed over the dollar as well and helped to keep the euro in a relatively tight trading range against the dollar for the past few months.
Reflecting how critical the issue of U.S. debt ceiling has become, top Treasury officials have been secretly exploring ways to prevent a financial meltdown that would be triggered if Washington was unable to pay its bills on time, sources told Reuters.
The Australian dollar climbed 0.3 percent against the dollar at $1.0732 after data showed a robust increase in June employment showed the economy was holding up well despite recent reports showing households becoming more cautious on spending.
Gold prices were little changed at $1,532.60 an ounce, while U.S. crude oil was up 68 cents to $97.33 a barrel.
(Additional reporting by Hideyuki Sano in TOKYO and Masayuki Kitano in SINGAPORE; Editing by Richard Borsuk)