Sydney - India's currency cartwheeled to historic lows on Monday while markets in Indonesia took a spill, evidence of how rising US yields are making it harder for emerging nations to fund their current account deficits.
The turbulence heightened investor caution ahead of Wednesday's minutes of the Federal Reserve's last policy meeting, with many fearing they might only add to the confusion about when it might scale back stimulus.
That helped gold reach its highest in two months, while keeping share markets constrained across Asia.
The Indian rupee slid as far as 62.50 per dollar, emphatically breaching the previous low of 62.03. The share market lost 1.4 percent, on top of a 4 percent drubbing last Friday.
The currency has been hurt by investor frustration at the slow pace of economic reform in India, which has made it harder for the country to finance its hefty current account shortfall.
The Reserve Bank of India has tried to restrict how much Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.
“The foreign investor community want tangible and ambitious reforms that look and feel like a worthy 'second generation' to the fundamental measures adopted in the early 1990s,” Westpac analysts said in a note.
They also found it “curious” the central bank would be fighting against a depreciation in the rupee given that it would help boost exports and limit imports over time.
Indonesia's rupiah shed 0.9 percent to four-year lows at 10,475 per dollar, with share and bond markets weakening in the wake of data showing a sharp widening in the country's current account deficit.
The task of attracting funding for these shortfalls has become ever tougher as investors priced in a start to Fed tapering and pushed up US market rates.
Yields on 10-year Treasury debt were up near two-year highs at 2.87 percent on Monday, putting upward pressure on borrowing costs across the globe.
The strain showed in MSCI's broadest index of Asia-Pacific shares outside Japan which fell 0.5 percent. It had ended last week with gains of 1.45 percent, but that merely recovered ground lost during the previous two weeks.
Stocks in Shanghai were off 0.2 percent, as was the Korean market. Thai shares shed almost 2 percent as data there showed the economy slipped into recession last quarter.
As usual Tokyo's Nikkei share average went its own way and rose 0.5 percent on Monday, brushing aside data showing the third-largest trade deficit on record as imports rose even faster than exports.
Australia's S&P/ASX 200 index was dead flat.
Crucial later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy might be stabilising and any improvement in the purchasing manager index will be welcomed by Asian investors.
The US dollar gave up early, modest gains to stand at $1.3330 per euro, barely moved from Friday. Against the yen it pulled back to 97.59, while the dollar index was a shade firmer at 81.306.
The dollar has been in gradual decline for the past six weeks so, in part on concerns the prospect of Fed tapering would scare foreign investors out of US bonds.
Figures out last week showed China and Japan - the two largest foreign holders of US debt - were at the forefront of a $66-billion exodus from long-term US Treasuries in June, dumping a net $40-billion.
Still, at some point yields should reach levels that are attractive to investors once more.
“We continue to believe that tapering will begin at the September meeting and, hence, support the USD, especially against high-yielding currencies,” analysts at Barclays said in a note.
They added, however, there was a chance the Fed may have begun discussing lowering its threshold rate for unemployment as a way to convince investors that rates will remain near zero for a long time to come.
“Any discussion in this regard is likely to be viewed as a dovish surprise by the market and lead to a near-term rally in the belly of the Treasury curve,” said Barclays. The dollar would also be vulnerable in such an event.
Hopes for a pick-up in growth globally has also supported commodities recently, with copper holding at $7,372 a ton after hitting a 10-week peak of $7,420 on Friday.
Gold and platinum have gained as well, though they could be threatened if the Fed does wind down its stimulus. Gold made a fresh two-month high of $1,384.10 an ounce.
Oil futures shrugged aside early losses to sneak higher, having recorded their the biggest weekly percentage gain in six weeks as turmoil in Egypt and Libya stoked worries about supply.
Brent crude futures for October were up 10 cents at $110.50 a barrel, while US oil for September added a matching amount to $107.56. - Reuters