TOKYO: Asian shares extended losses on Thursday as investors worried about a looming budget crisis in the United States, underpinning the safe-haven dollar and yen as well as US Treasuries on safety bids.
US stock futures were up 0.4 percent, however, pointing to a recovery when Wall Street opens after all major US stock indexes slumped over 2 percent overnight.
European shares were also seen rebounding from the previous day's sharp losses, with financial spreadbetters expecting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open as much as 0.6 percent higher.
MSCI's broadest index of Asia-Pacific shares outside Japan slid 1.2 percent, retreating from a near eight-month high on Wednesday, and looked set for its biggest one-day percentage drop in seven weeks.
South Korean shares and Hong Kong shares led the declines while Australian shares fell 0.7 percent, of lows after local October employment figures topped forecast.
Japan's Nikkei average fell 1.7 percent to a three-week low.
The benchmark US 10-year Treasury yield stood at 1.68 percent in Asia, after ending down 11 basis points at 1.6246 percent for its biggest single-day drop since May 30 on Wednesday when stock markets tumbled. Japanese government bonds also rallied, pushing 10-year yields down to a seven-month low of 0.750 percent.
"Uncertainty over the fiscal cliff is likely to support bonds," said Shinichiro Kadota, non-yen fixed income analyst at Barclays in Tokyo.
US politicians are facing a "fiscal cliff" of nearly $600 billion worth of spending cuts and tax increases set for early 2013 unless they reach a compromise soon to cut the deficit. There is also the issue of a debt ceiling, which needs to be raised to avoid a government shutdown.
If Washington does not reach a deal by year-end, investors fear the US economy could plunge back into recession and possibly take the global economy along with it.
"The general trend of weaker equities, higher bond prices and a weaker dollar will likely continue," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.
"A key gauge to risk appetite is how far US equities will decline and whether US 10-year yields will drop to 1.5 percent, as some had predicted," he said.
The dollar was up 0.1 percent to hover near a two-month high against a basket of major currencies of 80.924 hit on Wednesday, benefiting from the US currency's safe-haven appeal.
The dollar fell 0.2 percent against another safe-haven currency, the yen, to 79.80. The yen hit a low of 101.72 against the euro, its lowest in about a month.
Spot gold steadied at $1,715.89 an ounce after soaring to a 2-1/2-week high on Wednesday. Bullion is typically seen as a safe-haven but also tends to fall with a firmer dollar which makes dollar-based commodities more expensive for non-dollar holders.
"Now the global risk has moved to centre on the US and what it means for that barometer becomes a little messy and hard to tell," Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong, said of the dollar as a barometer of global risk.
"The dollar should weaken as the Fed offsets any slowdown, which I expect to be the end result, but in the near term if the market is nervous, it will bid up the dollar," he said.
The euro remained under pressure at $1.2747, near Wednesday's two-month low of $1.2736, despite positive news from debt-laden Greece where the parliament approved an austerity pacakage needed to unlock vital global aid and avert bankruptcy, defying political rifts and violent protestors.
Sentiment was dented by a gloomy outlook for Europe after the European Commission said the euro zone economy would barely grow next year.
The European Central Bank holds its policy meeting later in the day, and is expected to keep interest rates unchanged.
Some market watchers were looking for hints of future policy direction that may affect metals demand from the Chinese congress, which began on Thursday to usher in a once-in-a-decade leadership change against a backdrop of growing social unrest and public anger at corruption and a gap between rich and poor.
"So far, contents of speeches from the 18th Party Congress have been within expectations. There hasn't been anything particularly encouraging to investors," said Orient Futures derivatives director Andy Du.
Oil rebounded after tumbling more than $4 on Wednesday amid concerns about weak demand for fuel as the US and European economies face the risk of a prolonged slowdown.
US crude rose 0.6 percent to $84.96 a barrel, after settling at its lowest level since July at $84.44 while Brent added 0.7 percent to $107.51.
Sluggish equities sapped sentiment in Asian credit markets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 4 basis points.