[TOKYO] Asian shares extended losses to three-week lows on Friday, while the yen soared to a 17-month high against the dollar as investors bet Japan would be hard pressed to drive down its currency in the face of widespread foreign opposition.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 per cent, heading for a weekly drop of 1.8 per cent.
Japan's Nikkei pared earlier losses to near-two-month lows to trade 0.6 per cent lower, with financials under pressure. It's on track for a decline of 3.1 per cent for the week.
China's Shanghai Composite index slid 0.9 per cent, poised for a similar drop for the week. The CSI 300 was down 0.8 per cent, set for a 1.2 per cent weekly decline. Hong Kong's Hang Seng slipped 0.7 per cent, headed for 1.9 per cent loss for the week.
Bank shares led losses in Europe and the U.S. markets on Thursday, amid talk of more layoffs and cutbacks planned by Europe's major lenders as they struggle with zero rates.
The US S&P 500 Index lost 1.2 per cent, with financial shares falling 1.9 per cent. In Europe, the FTSEurofirst 300 closed down 0.8 per cent, hurt by a drop of more than 2 per cent in financials.
"When bank shares are making big falls and their CDS spreads are rising like this, obviously you would think something is afoot. If they keep falling in today's session, that is going to be really worrying," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
US stock futures slipped about 0.1 per cent further in Asian trade after Federal Reserve Chair Janet Yellen, in a conversation with former Fed chairmen, said the US economy is on a solid course and still on track to warrant further interest rate hikes.
Despite a chorus of comments from Fed policymakers about more rate hikes, many investors think the global economy is too weak to allow the Fed to raise rates all that fast.
The 10-year U.S. Treasuries yield fell to six-week low of 1.685 per cent on Thursday, and was last trading at 1.7097. US interest rate futures maintained their firmness, pricing in a less than 20 per cent chance of a rate hike in June.
Lower yields undermined the dollar, given that prospects of higher US yields were the main attraction behind the currency's firmness.
Investors instead bought back the yen, which had been long under pressure due to the Bank of Japan's massive monetary easing. "Japan's move towards negative rates, amid a general inability to create substantial nominal GDP and therefore inflation, is now resulting in a wave of JPY buying," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.
Traders believe it would be hard for Japanese authorities to intervene to stem the yen's rise after the Group of 20 agreement in February warned countries to refrain from competitive devaluation.
Finance Minister Taro Aso said on Friday Japan will take necessary steps on currencies, but declined to comment on the issue of intervention.
The yen strengthened to 107.67 to the dollar on Thursday, its highest since October 2014, and last stood at 108.64, heading for a weekly gain of 2.6 per cent.
The dollar index, which tracks the greenback against a basket of six rival currencies, was up about 0.1 per cent at 94.583, poised for a flat weekly performance.
The euro also hit a six-month high of US$1.1454 the previous day and last fetched US$1.1361, set to end the week up 0.2 per cent.
On the other hand, commodity-linked currencies and many emerging economy currencies stepped back from recent multi-month highs as risk-averse mood took hold on investors.
The Australian dollar traded at US$0.7533, having fallen 1.3 per cent on Thursday.
In the commodities market, copper suffered its biggest fall in more than six months on Thursday, slumping 2.8 per cent on the day and hitting a six-week low of US$4,631 a tonne.
China may be about to shock the global copper market by unleashing some of its stockpiles of the metal, which are near record highs, on to the global market.
The metal was last trading at US$4,660 a tonne.
Oil prices rose on Friday after firm economic indicators from the US and Germany implied support for fuel demand, but analysts warned another downturn could be on the way due to ongoing oversupply.
Global benchmark Brent crude futures climbed 1.3 per cent to US$39.96 per barrel, set for an increase of 3.4 per cent on the week. US crude advanced 1.8 per cent to US$37.92, on track for a 3.1 per cent weekly gain.