Dollar steadies after Korea tensions weigh on stocks

By Nigel Stephenson

LONDON (Reuters) - Shares fell in Europe and Asia on Wednesday as simmering tension over the Korean peninsula kept investors wary of taking on risk, although Wall Street looked to have put its worst fears behind it and the dollar edged higher

U.S. index futures were all in positive territory, indicating Tuesday's slide in reaction to North Korea's sixth and biggest nuclear weapons test on Sunday may have been arrested.

The S&P 500 suffered its biggest one-day fall in three weeks on Tuesday.

Oil price rose, with Brent crude hitting its highest since late May.

The dollar also made slight gains against the yen, having fallen 1 percent at one point on Tuesday.

Yields on safe-haven U.S. Treasuries, which fell to their lowest in nearly 10 months on Tuesday, and German government debt, both rose, with the outlook for monetary policy also drawing investors' attention.

A meeting on Thursday of European Central Bank policymakers is expected to yield some clues as to when they will begin to scale back monetary stimulus.

"A lot will depend on how (ECB President Mario) Draghi addresses the euro. I'm quite confident that he'll address it in some way, but the question is whether he'll address it strongly enough for the market to react," said Commerzbank currency strategist Esther Reichelt, in Frankfurt.

The pan-European STOXX 600 share index fell 0.4 percent, close to its opening levels.

In the latest developments in the North Korea nuclear crisis, Russian President Vladimir Putin said after meeting his South Korean counterpart in Vladivostok that it could not be resolved with sanctions and pressure alone.

Separately, a top North Korean diplomat warned on Tuesday his country is ready to send "more gift packages" to the United States.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 percent and Tokyo's Nikkei hit a four-month low, closing down 0.1 percent. South Korea's KOSPI index ended down 0.3 percent at a near four-week low.

The dollar gained 0.1 percent against a basket of currencies and a similar amount to 108.87 yen,, which investors often seek during uncertain times.

Japan is the world's largest net creditor country, and traders assume Japanese repatriation from foreign countries will eclipse foreign investors' selling of Japanese assets.

The euro was up 0.1 percent at $1.1921.

Ten-year Treasury yields edged up to almost 2.08 percent, having fallen as far as 2.065 percent on Tuesday.

Tuesday's fall in Treasury yields also followed cautious comments from Fed policymakers, which investors perceived as making a third interest rate rise this year unlikely.

Indeed, the average yield on local-currency emerging-market sovereign debt dropped below 6 percent for the first time since February 2015.

Fed Governor Lael Brainard said on Tuesday the central bank should be cautious about tightening policy further until it was clear inflation was heading towards target.

German 10-year yields, the euro zone benchmark, inched up to 0.34 percent, having earlier hit their lowest in a week at 0.325 percent

TAKING A VIEW

"We've got the oil price higher, which is something that is often consistent with a move higher in bond yields," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "After such a significant downward move in U.S. Treasury yields, there's also a bit of retracement there."

Gold, another asset sought in troubled times, was up 0.1 percent to $1,339 an ounce after touching $1,344 on Tuesday, its highest since September 2016.

Oil prices rose as U.S. refineries re-opened after Hurricane Harvey, even as Hurricane Irma headed towards the Caribbean.

Brent crude, the international benchmark, rose 79 cents to $54.17, its highest since late May.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Shinichi Saoshiro in Tokyo and Dhara Ranasinghe in London; Graphic by Marc Jones; Editing by Catherine Evans, Larry King)