HONG KONG - The euro fell to a two-month low on Friday, with Europe's fiscal problems looking more likely to spread than be solved in the near term, while the looming year-end kept many equity investors eager to take profits, weighing on Asian stock markets. Major European stock markets fell, with the FTSEurofirst 300 opening down 0.5 per cent (.FTEU3) in early trade and London's FTSE 100 down 0.7 per cent (.FTSE). US stock index futures were down 0.4 per cent. Caution ruled in financial markets, with thinning volumes and pockets of risk, especially North Korea's saber rattling ahead of the South's military exercises with the United States this weekend, driving more stock investors to take profits on the year's winning sectors in Asia. The Australian dollar slid after the head of the country's central bank said interest rates were about right for the near term, extinguishing speculation the currency's yield advantage would get a policy boost in the next few months. The MSCI index of Asia Pacific stocks outside Japan fell 1.4 per cent (.MIAPJ0000PUS), weighed down the most by a 2 per cent decline in the consumer discretionary sector. Powered by the view that the hunger of Asia's consumers for big-ticket items such as cars and appliances will keep growing, this sector is up 27 per cent so far this year (.MIAPJCD00PUS), making it still by far the best performer. The benchmark KOSPI index in South Korea fell 1.3 per cent (.KS11) ahead of a tense weekend, with the North threatening war over joint US-Korean military exercises. Japan's Nikkei share average (.N225) slipped 0.4 per cent on the day, with strength in larger exporter shares offset by weakness in retailers and industrial stocks. The Nikkei's 9.1 per cent rise in November, driven in part by a weakening of the yen, is on course to be the biggest monthly gain since March. "Recent purchases done by foreign investors are not simply short covering but I think fresh funds are being poured into Japanese shares. More follow-through buying could drive up shares prices further," Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. Correspondingly, the US dollar's 4.5 per cent rise against the yen is also the steepest single-month advance since March. Japanese government bonds, in turn, sold off, with 10-year futures down 2.6 points in November, the biggest monthly decline since April 2008. The December contract was down 0.5 point at its lowest since June 23, ahead of new supply of 10-year debt next week. The flows across the yield curve have been erratic, and dealers are keeping watch of cash yields of mid-maturity bonds to see if they follow the 10-years higher, which would trigger more bullish bets to be folded. The US dollar nudged up, though mainly because of weakness in other currencies. The euro was down 0.7 per cent at $1.3262, as traders grew tired of waiting for a possible squeeze of bets against the currency and sold it ahead of the weekend. "We've been hearing one piece of bad news after another from the euro zone lately. There's even talk of a breakup of the euro zone," said Tsutomu Soma, manager of foreign securities at Okasan Securities in Tokyo. Many traders were keeping a close watch of Portugal, which could be next in the firing line among the euro zone's fiscally vulnerable countries. A majority of euro zone nations and the European Central Bank are urging Portugal to apply for a financial bailout from a European rescue fund, Financial Times Deutschland reported on Friday, without naming its sources. The Australian dollar was down 1.2 per cent to US$0.9683 after Reserve Bank of Australia Governor Glenn Stevens said policy was appropriate for now, suggesting the central bank was in no hurry to tighten rates. He later said it was not unreasonable for investors to price in a rate hike in the middle of 2011, a comfort to longer-term investors in the Australian dollar but no solace for short-term bulls who had hoped for a near-term push to parity.
