Asia stocks, U.S. dollar drop with oil above $116

By Kevin Plumberg

HONG KONG (Reuters) - Asian stocks fell on Thursday on investors worried about the ability of the region's exporters to weather a widespread economic slowdown, while the U.S. dollar slid as oil prices rose above $116, halting the currency's rally.

European stocks were expected to open as much as 0.7 percent lower as higher oil prices rekindled worries about inflation and consumer spending, according to financial bookrunners, with the euro pushing up toward $1.48.

The U.S. housing market, the source of a financial crisis that threatens to drag all Group of Seven rich nations into a recession, remained a chief concern, as shares of top mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) tumbled overnight to their lowest in nearly 20 years.

Instability in the financial sector continued to ripple through markets and breed nervousness. The Federal Reserve acted on rumors last month and called Credit Suisse Group (CSGN.VX: Quote, Profile, Research, Stock Buzz) to see if it had pulled a credit line from U.S. investment bank Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz), the Wall Street Journal said.

Crude prices rose for a third day after an agreement on a U.S.-Poland missile shield drew a cold response from Russia, the world's second-largest oil producer.

U.S. crude futures jumped by more than $1 to $116.84 a barrel, adding to cost headaches and profit pressures for corporate managers already frazzled by shrinking demand.

"Exporters don't have power to keep rising as the U.S. and European economies are getting worse and the demand volume is declining," said Takahiko Murai, general manager of equities at Nozomi Securities in Tokyo.

Shares of high profile exporters such as Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz), Samsung Electronics Co Ltd (005930.KS: Quote, Profile, Research, Stock Buzz) and Taiwan Semiconductor (2330.TW: Quote, Profile, Research, Stock Buzz) were among the top drags on their respective indexes.

Japan's Nikkei share average .N225 finished down 0.8 percent, within striking distance of chart support around 12,670 points, below which would mark a 4-1/2-month low.

Outside Japan, Asia-Pacific shares fell 1.4 percent, approaching a 17-month low touched on Tuesday, according to an MSCI index .MIAPJ00000PUS.

Babcock & Brown Ltd stock (BNB.AX: Quote, Profile, Research, Stock Buzz) plunged 35 percent after the investment firm's chief executive and chairman stepped down, leading the decliners on Australia's S&P/ASX 200 index , which fell 1 percent.

Babcock's shares have lost nearly 90 percent in value this year as worries grow about the viability of its debt-funded investment model amid the global credit crunch.

Hong Kong's Hang Seng index .HSI dropped 1.8 percent after dipping to a 1-year low on Wednesday, with a fall in China Mobile (0941.HK: Quote, Profile, Research, Stock Buzz) shares leading the way.

The Shanghai composite index declined 3.1 percent .SSEC, unable to sustain momentum after posting its biggest single-day rise in four months on Wednesday.

NO WORD FROM BEIJING

Hopes for a near-term fiscal stimulus package from Beijing faded amid doubts about the need for government support in what is still the world's fastest growing major economy.

Louis Wong, research director with Phillip Securities in Hong Kong, said markets were unlikely to get a helping hand from China's government any time soon, especially since the country's financial sector is in relatively good shape compared with Europe and the United States.

"There have been no bank failures in China and mainland banks are reporting high double digit earnings growth, so what is the logic for a stimulus package?" he said.

Unidentified officials with China's National Development and Reform Commission and the Ministry of Finance denied or said they were unaware of market talk that China was considering a 200-400 billion yuan stimulus plan, according to the International Finance News.

There were also signs that slack demand from developed economies for Asian exports is shifting the global trade dynamic. July figures from Japan showed exports to China topped exports to the United States for the first time since World War II.

Whether demand from China alone could support the entire global economy is another issue altogether. Expectations for the global economy have fallen to their lowest level in nearly 18 years, with the outlook in Western Europe and Asia deteriorating, the Ifo economic research institute said on Wednesday.

Oil price gains helped hold back the U.S. dollar, which has rallied more than 8 percent in the last month against the euro on increasing signs the European Central Bank will not raise interest rates this year to fight inflation as the economy shrinks.

The euro was up 0.35 percent at $1.4795, well above a six-month low of $1.4630 touched on Tuesday, but below a record high of $1.6040 in mid-July.

Against the yen, the dollar dropped 0.8 percent to 108.92 yen, almost 2 yen below a seven-month high of 110.67 yen hit last week.

Spot gold edged up 0.6 percent to around $817.40 an ounce as firmer oil prices encouraged safe-haven asset buying.