World markets were on tenterhooks Tuesday ahead of a key US interest rate decision, with Asian stocks mixed and the dollar taking a breather after Wall Street held its nerve in the face of growing credit woes.
The Federal Reserve was widely expected to slash its key lending rate later in the day to try to ease turmoil on US financial markets and ward off the threat of a prolonged recession in the world's largest economy.
In Asia some markets managed to stage modest rebounds after the Dow Jones Industrial Average ended slightly higher overnight in New York at the end of a rollercoaster day. Gold and oil prices were lower.
Tokyo was up 0.6 per cent in early afternoon trade as bargain hunters emerged a day after the index plunged 3.7 per cent to a 31-month low. Sydney edged up 0.1 per cent and Singapore added 0.6 per cent.
But Chinese share prices faced further selling pressure as Premier Wen Jiabao said tackling inflation remained the top priority, suggesting that more monetary tightening measures could be on the way, dealers said.
Hong Kong lost 2.0 per cent, reversing early gains, as Shanghai fell 1.8 per cent.
Investors fear that the Fed may be running out of ammunition to ease gridlock in US credit markets. Some analysts said that even a big rate cut by the Fed later Tuesday might not be enough to prop up ailing markets.
"We are experiencing a meltdown in financial markets and the market is aware of the risk that this will have deeper consequences than an economic slowdown," warned Sumitomo Mitsui Banking Corp. chief strategist Daisuke Uno.
Oil prices retreated in Asian trade from record highs of almost $112 on worries that energy demand will be hit by the financial market turbulence.
Gold prices -- which have soared recently on safe-haven buying -- opened about two per cent lower in Hong Kong as a degree of calm returned to other financial markets.
The near collapse of Wall Street bank Bear Stearns, which is being sold to JPMorgan Chase for a rock-bottom price, has sent shivers through global markets.
But investors on Wall Street held their nerve on Monday when the Dow Jones Industrial Average gained 0.18 per cent to finish at 11,972.25.
Persistent worries about the credit markets and the weak dollar were expected to keep a cap on gains, dealers said.
"Uncertainty over the credit market has yet to be cleared up, as there remains a possibility that US banks may report larger writedowns," said Fumiyuki Nakanishi, chief strategist at SMBC Friend Securities.
Major currencies took a breather ahead of the Fed decision.
The dollar was at 97.00 yen in Tokyo morning trade, off its 12-year low of 95.75 struck a day earlier. The euro was at $1.5747, down from Monday's record high of $1.5905.
Markets were waiting nervously for earnings results from US investment banks Lehman Brothers and Goldman Sachs later Tuesday, followed by Morgan Stanley on Wednesday, amid fears of fresh fallout from the credit crunch.
Investors were anticipating a bold move by the Fed to try to ease strains on the US financial system, with some traders betting on a rate cut of as much as 100 basis points, twice as much as had been expected just last week.
The meeting follows an emergency cut by the Fed to one of its other rates on Sunday after Wall Street giant Bear Stearns was sunk by the credit crunch.
The Federal Open Market Committee (FOMC) has already slashed its key federal funds interest rate by 225 basis points to 3.00 per cent, since September to try to bolster the economy in the face of a US housing slump and related credit crunch.
SMBC's Nakanishi said that a 75 basis point Fed cut Tuesday would be "the best scenario" for the Tokyo market, where there was also nervousness about a stalemate in appointing Japan's next central bank chief.
"While rate cuts will definitely lift sentiment, the dollar may not fall further," Nakanishi said. (AFP)
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