Dollar on defensive, Asia stocks subdued amid U.S. trade unease

By Wayne Cole

SYDNEY (Reuters) - The dollar was under pressure in Asia on Tuesday as U.S. President Donald Trump's focus on trade protectionism fuelled suspicions his administration might seek a competitive advantage through a weaker currency.

The talk of trade wars favoured safe-haven Treasuries and the Japanese yen while leaving equities mixed.

MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.1 percent but Tokyo's Nikkei slipped 0.3 percent.

Sentiment took a fresh knock when U.S. Treasury Secretary nominee Steven Mnuchin told senators that he would work to combat currency manipulation but would not give a clear answer on whether he views China as manipulating its yuan.

In written answers to a Senate Finance Committee, Mnuchin also reportedly said an excessively strong dollar could be negative in the short term.

The dollar duly skidded as far as 112.52, breaking last week's trough and the lowest since late November, before steadying at 112.81. Its 1.7 percent loss on Monday was the largest since July 29.

Against a basket of currencies, the dollar index was down 0.1 percent at 100.040, while the euro hopped up to $1.0760. Both were levels last seen in early December.

Sterling hit a six-week peak at $1.2546 on speculation that Britain's Supreme Court would rule on Tuesday that the government needs parliamentary approval to trigger formal Brexit talks.

While Trump promised "massive" cuts in taxes and regulations on Monday, he also formally withdrew from the Trans-Pacific Partnership (TPP) trade deal and talked of big border taxes.

"It's interesting that markets did not respond positively to a reaffirmation of lower taxes and looser regulation, reinforcing the impression that all the good news is discounted for now," wrote analysts at ANZ in a note.

"As week one in office gets underway, there is a growing sense of scepticism, not helped by the tone of Friday's inaugural address and subsequent spat with the media."

Doubts about exactly how much fiscal stimulus might be forthcoming helped Treasuries rally. Yields on 10-year notes dropped 6 basis points to 2.401 percent on Monday, the steepest single-day drop since Jan. 5.

Two-year yields were at 1.16 percent, narrowing the dollar's premium over the euro to 183 basis points from a recent top of 207 basis points.

Wall Street lost just a little of its recent gains. The Dow Jones fell 0.14 percent, while the S&P 500 .SPX lost 0.27 percent and the Nasdaq 0.04 percent.

Shares in Qualcomm Inc dived almost 13 percent after it was sued by Apple on Friday.

The drop in the dollar boosted gold to a two-month high and the precious metal was last trading at $1,217.00 an ounce.

Oil prices lagged as signs of a strong recovery in U.S. drilling largely overshadowed news that OPEC and non-OPEC producers were on track to meet output reduction goals.

U.S. crude futures added 14 cents or 0.3 percent to $52.88, paring some of its overnight losses, while Brent crude was yet to trade at $55.23 a barrel. [O/R]

(Reporting by Wayne Cole; Editing by Eric Meijer and Kim Coghill)