Asia braces for big falls after Fed minutes

By Wayne Cole

SYDNEY (Reuters) - Asian markets look set for a rough ride on Thursday after minutes from the Federal Reserve July policy meeting were taken as affirming the outlook for a near-term tapering in stimulus, sending Treasury yields to two-year highs.

Wall Street stocks sold off, the U.S. dollar surged and borrowing costs rose globally. All of which is bad news for emerging markets that have come to rely on cheap dollars to underpin domestic demand and fund current account shortfalls.

South America provided a taste of what was likely to come for Asia, with the Brazilian real tumbling 2.5 percent and the Mexican peso 2.2 percent. The turmoil was enough to make Brazil's central bank chief cancel a trip to the United States.

Dealers said the violence of the market reaction was partly because some investors had hoped the Fed would lean against the recent climb in Treasury yields. Instead the minutes showed most Fed members felt the outlook for tapering had not changed.

"That does not smack of a Fed going out of its way to fight the back-up in bond yields at the time, which is partly why Treasuries have sold off," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.

"Most other asset markets are taking their lead from Treasuries, and the minutes provide no obvious relief for the stresses in the emerging market world."

Markets from India to Indonesia have already been under intense pressure from expectations Western investors will repatriate funds now that yields at home are rising.

A confused policy response by some governments has only added to the sense of foreboding and sent funds fleeing the region.

Traders expected currencies and stocks in India, Indonesia and Thailand would be under particular pressure on Thursday, likely requiring more official action to support assets.

Investors also face an added hurdle in HSBC China Flash PMI for August due later on Thursday. A weak reading would give markets another excuse to push the currencies and shares lower.

Doing the most damage was a jump in 10-year U.S. Treasury yields to almost 2.9 percent, a level last seen in July 2011. This is a major chart level and a break could see the market quickly test 3 percent, which itself is a huge psychological marker.

Treasury yields tend to set the benchmark for borrowing costs across the globe, so the rise will make it more difficult for indebted countries and companies to pay their bills.

That was not taken well by stocks, with the Dow Jones industrial average down 0.7 percent and the Standard & Poor's 500 Index off 0.58 percent.

MSCI's all-country stock index shed 0.85 percent, while the pan-European FTSEurofirst 300 index closed down 0.6 percent.

The prospect of higher returns gave the U.S. dollar a lift across the board. The euro was back at $1.3350, from a high of $1.3452 on Wednesday.

The dollar index, which measures the greenback versus a basket of six currencies, rose to 81.377 , from a low of 80.896. The dollar's gains on the yen were more restrained at 97.77, in part because dealers expected the Japanese currency would get a lift from safe-haven flows.

Commodity prices were generally lower. Copper futures lost 1 percent to $7,239.85, while gold backtracked to $1,364.24 an ounce.

Brent crude oil fell below $110 a barrel on reports some Libyan oil exports might soon resume and on news the Seaway crude oil pipeline had shut, halting shipments from the U.S. Midwest to the Gulf Coast.

Brent futures for October were off 42 cents at $109.73 a barrel. U.S. October oil fell $1.26 to settle at $103.85 a barrel.

(Editing by Dean Yates)