Asian shares ease, dollar rallies as risk appetite wanes

HONG KONG, Nov 3 - Asian stocks dropped and the dollar rallied to a one-month high against a basket of currencies on Tuesday as investors retreated from risk assets on renewed jitters over banks and speculation over removal of fiscal stimuli.

The Australian dollar fell more than 1 percent on the day against the U.S. currency to $0.8916, approaching its weakest in nearly a month.

The Aussie was also pressured lower on the view that Australia's central bank will be cautious about raising interest rates in the future following a widely expected lift earlier in the day.

Housing prices are on a tear in Australia, similar to other parts of Asia, keeping monetary authorities increasingly willing to take action to prevent bubbles, but Tuesday's modest rate rise pointed to gradual not aggressive tightening.

"Clearly the Reserve Bank did not want to frighten the horses by lifting interest rates by half of one percent at this time," said Craig James, chief equities economist at Comsec in Australia. "It is a gradual approach to lifting interest rates."

Markets are also awaiting signals from a two-day U.S. Federal Reserve meeting that starts Tuesday. The Fed is not expected to depart from a policy of maintaining low rates for an extended period of time but it could discuss how to prepare markets for an eventual policy shift.

The European Central Bank and the Bank of England are expected to keep rates on hold but the UK central bank may decide to pump yet more money into the economy.

Sterling tumbled to a one-week low against the dollar after the UK Treasury announced a shake-up of British banks, which raised concerns about its financial system.

The government will raise its economic interest in Royal Bank of Scotland while keeping its ordinary share stake steady and Lloyds Banking Group said it would launch a record 13.5 billion pound ($22 billion) rights issue.

The dollar index rose to 76.742, its highest since early October, pushing commodity prices lower.

"There is a general sense of risk aversion," said Geoffrey Yu, currency strategist at UBS in London.

Oil fell more than $1 per barrel towards $77, while gold prices steadied below $1,060 as a rebounding dollar offset news that the International Monetary Fund had sold 200 tonnes of gold to India's central bank off market.

EQUITIES DROP

The MSCI index of Asia Pacific stocks outside Japan fell about 1.5 percent to levels not seen since early October.

The regional gauge has now fallen in eight of the last ten sessions, but gains for the year continue to exceed 55 percent.

The Indian stock market, returning from a long weekend, fell the most in the region with a 3.1 percent drop led by energy giant Reliance Industries reeling from a lingering founding family dispute.

China's key stock index rose 1.2 percent in active trade as signs of a rise in bank lending lifted optimism for sustained economic growth despite a major new share offer.

"Investors are maintaining their optimistic stance toward economic data and listed firms' earnings, while expecting Chinese monetary policy to remain stable for the moment," said Chen Shaodan, senior analyst at Stockfly Securities in Beijing.

In Hong Kong, local developers and banks succumbed to profit taking, dragging the benchmark Hang Seng index down 1.8 percent, its second straight losing session.

Stocks in Australia, Korea, Taiwan and Singapore fell less than a percent, while Japan's market was shut for a public holiday.