Europe woes and U.S. rate outlook depress stocks, boost dollar

By Shinichi Saoshiro

TOKYO (Reuters) - Asian stocks sagged and the dollar stood tall on Wednesday on growing prospects the Federal Reserve was on track to raise interest rates later this year and concerns that financial woes could engulf Spain in addition to Greece.

Taking a lead from Wall Street's slide, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.8 percent. Shares in Australia dropped 0.8 percent, South Korea fell 1.6 percent, Hong Kong eased 0.6 percent, while Tokyo's Nikkei dipped 0.1 percent.

The Dow and S&P both lost 1 percent on Tuesday on Greek debt concerns and after upbeat U.S. economic data added fuel to expectations that the Fed will raise rates sooner rather than later.

Higher interest rates for the world's largest economy could lessen the allure of equities, not only in the United States but also in other countries.

Indicators on Tuesday showed U.S. business spending plans increased, consumer confidence improved and house prices extended gains. The data supported the stance taken by Federal Reserve Chair Janet Yellen, who said on Friday that the central bank could hike rates this year if the economy keeps improving.

The dollar was on a bullish footing, hoisted higher as U.S. debt yields rose on the strong economic indicators. The greenback received a further boost as the euro slid not only on persisting Greek woes but signs that the Spanish public was also tiring of austerity.

With Athens already facing the possibility of missing its June 5 debt repayment deadline to the International Monetary Fund, the mood in Europe became even more edgy as voters in Spain punished the ruling Popular Party in local elections after years of austerity policies.

"Greek tensions are spreading to other European markets, as political instability has escalated, notably in Spain and Poland," strategists at Barclays wrote.

"Spanish equities fell and bond yields rose as the regional and municipal elections delivered a highly fragmented verdict," they said.

The euro was steady at $1.0876, staying close to a one-month low of $1.0864 struck overnight. The dollar was little changed at 123.06 yen, within reach of an eight-year peak of 123.33 yen hit overnight.

Commodities felt the impact of a stronger dollar, with crude oil prices tumbling nearly 3 percent overnight. U.S. crude managed to edge up 0.3 percent to $58.35 a barrel on bargain hunting after the slide while Brent gained 0.2 percent to $63.85 a barrel.

(Editing by Jacqueline Wong)