Asian shares soft as Ukraine dampens risk sentiment

By Hideyuki Sano

TOKYO (Reuters) - Asian shares struggled to find a solid footing on Thursday as escalating tensions in Ukraine sent investors scurrying to the safety of the dollar and U.S. Treasuries.

Japanese stocks skidded, with the Nikkei slipping 0.1 percent while MSCI's broadest index of Asia-Pacific shares outside Japan were almost flat after initial losses.

Wall Street's failure to extend its rally above historical highs on Wednesday did not help soothe the anxiety that a wider conflagration in Ukraine could lead to more risk aversion and damage vulnerable emerging markets.

Russian President Vladimir Putin ordered drills by his armed forces to test combat readiness in western Russia, near the border with Ukraine, prompting Washington to warn a military intervention would be a "grave mistake.

The Russian rouble tumbled to a five-year low against the dollar and all time-lows against the euro.

The Ukrainian hryvnia hit record lows on Wednesday after Ukraine's central bank said it was abandoning a managed exchange rate policy.

Safe-haven U.S. Treasuries benefited from the sombre mood in markets, with the 10-year U.S debt yield falling to a three-week low of 2.662 percent, despite surprise strength in U.S. new home sales data.

Investors are now looking to comments from Fed chief Janet Yellen's testimony at a U.S. Senate committee on Thursday on her views on a recent run of soft U.S. data, which investors chalk up to bad weather, rather than weakening in the fundamentals.

The dollar also strengthened broadly, with the dollar index hitting its highest level in about two weeks.

"Given U.S. debt yield fell and that U.S. shares were steady to softer, the dollar's strength should be regarded as a reflection of risk aversion rather than rising confidence in the U.S. economy," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy.

The euro traded at $1.3681, after having fallen 0.4 percent to two-week lows on Wednesday. Against the yen, which also tends to rise when markets are under stress, the dollar was little changed at 102.37 yen.

The tense backdrop could put renewed pressure on many emerging market currencies and shares, which were battered earlier this year on concerns about slower global growth and the tapering of the U.S. Federal Reserve's monetary stimulus.

One of the hardest hit countries, Turkey saw its lira slipping to three-week lows, dented also by a corruption scandal embroiling Prime Minister Tayyip Erdogan's government.

Brazil's central bank raised its benchmark interest rate on Wednesday to 10.75 percent from 10.50 percent as expected, slowing the pace of monetary tightening to avoid hurting an economy that is flirting with recession.

The Chinese yuan rebounded from a seven-month low hit on Wednesday, though it traded below the daily fixing set by Beijing for a third consecutive day.

The renminbi stood at 6.1231 per dollar, off Wednesday's low of 6.1351 but below the fixing at 6.1224.

Traders suspect the People's Bank of China (PBOC) is possibly aiming to inject more two-way volatility into the market and prepare it for more reforms.

"It's possible that the Chinese authorities think they need a weaker yuan now to bolster the economy," said Hirokazu Yuihama, senior strategist at Daiwa Securities.

The CSI300 of the biggest Shanghai and Shenzhen A-share listings rebounded slightly on Thursday after having slipped to eight-month low on Wednesday on concerns over slowdown as well as fear of lending curbs.

Copper dropped to a three-month low of $7,002.50 a tonne, extending its losses over the past week on concerns about slower growth in China.

Gold also stepped back after hitting a four-month high on Wednesday as the dollar strengthened broadly. It last stood at $1,325.90 an ounce, off Wednesday's high of $1,345.35.

(Editing by Shri Navaratnam and Eric Meijer)