The US dollar rose broadly today, hitting a two-year high against sterling, with a downtrend in commodity prices intact, leaving investors scurrying to buy back the currency and sparking a rebound in Asian stocks.
European stock markets are expected to open little changed, according to financial bookmakers, with volumes likely lower than average because of a UK public holiday.
Recent reports showing shrinking or no economic growth in Britain, the euro zone and Japan have boosted the attraction of the dollar as an alternative investment, especially with crude prices trading more than $30 below a record high hit in July.
A rally in the dollar stalled last week after hitting a six-month high against the euro, but an upward trend in the US currency is seen intact.
Asian stocks rebounded from a two-year low as the drop in oil prices back below $120 a barrel lifted shares of companies sensitive to energy prices, though trading volumes across the region were quite thin, suggesting a lack of conviction among investors.
Japan's Nikkei share average ended up 1.7 per cent, after shares of Japan's second-largest car maker, Honda Motor, led the way higher.
The MSCI pan-Asia stocks index was up 1.6 per cent, after hitting the lowest since July 2006 on Friday. The MSCI Asia-Pacific ex-Japan index rose 1.2 per cent. Australia's benchmark share index was up 1.7 per cent, helped by rallying shares of the country's top banks.
Hong Kong's Hang Seng index led the region, up 3 per cent after plumbing a one-year low on Friday. Shares of offshore Chinese oil producer CNOOC were up 4.3 per cent and among the biggest boosts to the index, with the company expected to report solid first-half results on Wednesday.
The euro fell 0.4 per cent to $1.4721, about a cent away from last week's low.
The British pound had fallen as low as $1.8405 its lowest since July 2006. Sterling was hurt by data on Friday that showed UK gross domestic product was unchanged in the second quarter compared with an initial estimate of 0.2 per cent growth - bolstering the case for lower interest rates to spur activity.
Oil crept up after suffering the biggest daily decline since 2004 on Friday, on Russia's pledge to withdraw the bulk of its troops from Georgia and the uneventful passing of Tropical Storm Fay near the Gulf of Mexico.
Crude's large drop so far, however, has not been enough to entice fund managers to take on more risk for higher returns. Some instruments used to measure risk have been reflecting relatively low market volatility, and equity valuations have become attractive.
Hopes of a saviour for beleaguered Lehman Brothers Holdings pushed up shares in the investment bank on Friday after the state-run Korea Development Bank said on Friday buying Lehman is an option.
Still, regional risk measures show investors frozen in cautious mode rather than ready to dive back into markets in search of bargains. The iTRAXX Asia ex-Japan index of high-yield credit default swaps has been stable in the last month, between 515 and 560 basis points.
That range is in the middle of a record high hit in March amidst the meltdown of Bear Stearns and a low in May when stock markets recovered. Credit default swaps are insurance-like contracts that protect against corporate defaults and restructuring.
Gold cut some of its earlier losses to trade down 0.2 per cent at $821.10 an ounce in the spot market, having shed more than $150 in the last month as oil prices fell and the dollar strengthened.
Reuters