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The yen firmed and Asian shares slipped on Monday after an unusual bailout proposal for Cyprus rattled investor nerves, while Friday's halt to Wall Street's long winning streak further dampened sentiment.
Euro zone finance ministers want Cypriots to pay up to 9.9% of their deposits in return for a 10 billion euro aid package. If approved by the island's parliament on Monday, it will be the first time savers have had to foot part of the bill for a European bailout, raising fears that the model could become a precedent for future bailouts in the euro zone.
A government source said that Cyprus was working on a last-minute proposal to soften the impact on smaller savers of a bank deposit levy after a parliamentary vote on the measure central to a bailout was postponed until Monday. The originally proposed levies on deposits are 9.9% for those exceeding 1,00,000 euros and 6.7% on anything below that.
"The week has started with a clear rise in risk aversion, following the surprise weekend decision in Brussels to slug all depositors in Cypriot banks with a levy in order to approve 10 bn euro bailout funds," said Sean Callow, a senior currency strategist at Westpac, in a note.
The yen rose broadly early in Asia, briefly touching 93.45 yen against the dollar, strengthening sharply from around 96.11 yen in late New York on Friday. The euro sank to a low of 121.585 yen from around 124.93 yen late on Friday.
The risk-sensitive Australian dollar lost almost two full yen in choppy trading before steadying at 98.17 yen.
The euro touched a three-week low of $1.2895 early on Monday, down from late Friday's level around $1.30.
The MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.8%, with Australian shares plunging 1.7% and South Korean shares opening down 0.6%.
The yen's rebound weighed on Japanese shares, with the Nikkei stock average opening down 1.6%.
"We will have a correction today. In the New York Stock Exchange, the Dow fell after a 10-day winning steak," said Takashi Hiroki, chief strategist at Monex Inc. "The yen is back to 95 to the dollar. This is bad news for the Japanese market."
Wall Street stocks fell on Friday as a drop in JPMorgan Chase led to the end of Dow Jones industrial average's 10-day rally, while European shares retreated from 4-1/2-year highs.
While uncertainty over how the development in Cyprus will affect the broader euro zone markets later on Monday will weigh on investor sentiment in Asia, some say fears of contagion risk are overdone.
"There will certainly be confusion in Cyprus and investors looking just at headlines may fret about its case becoming a model," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
"I doubt that the case in Cyprus will trigger contagion risks across the euro zone, as the size of the country is too small and its industrial structure is very different from other euro zone members, in that Cyprus is dependent on just tourism and the financials sector," Saito said.
Data on Friday continued to show growth in US manufacturing, but the positive news was overshadowed by other reports showing US consumer sentiment fell to its lowest in over a year, while inflation picked up.
US crude slumped 1.1% to $92.44 a barrel.
