* Pressure eases in credit markets, volatility drops
* 3-mth US Treasury yield at highest since Lehman
bankruptcy
* Dollar holds near 16-month high
(Updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Oct 21 (Reuters) - Asian stocks rose on Tuesday,
boosted by signs that government efforts to push down
short-term lending rates were working and comments by Federal
Reserve Chairman Ben Bernanke backing more fiscal spending to
support the U.S. economy.
Major European share markets were expected to open as much
as 2 percent higher, financial bookmakers said, as improvements
in credit conditions slowly strengthened confidence in
financial markets, though deteriorating economic conditions
could cap gains.
Oil prices climbed on expectations OPEC will cut output to
boost prices, which have fallen nearly 50 percent in the last
three months, at a meeting on Friday.
The outcome will be intensely watched since lower energy
prices have been a relief for policymakers and consumers alike
facing a sharp global slowdown.
With money markets appearing to loosen up, investors have
turned their attention to policymakers' efforts to brace their
economies for a potential global recession.
Japan signalled a willingness to broaden its bank bailout
scheme to the country's biggest banks on Tuesday in a bid to
fend off fallout from the global credit crisis; India's central
bank cut rates by a percentage point on Monday; and China at
the weekend announced a series of moves to support growth.
Expectations that central banks around the world will have
to catch up with the Fed's cumulative 3.75 percentage points of
rate cuts since the financial crisis began more than a year ago
bolstered the U.S. dollar.
"Market action confirmed that the worst has been avoided
amid government bailout plans announced last week," said
Dariusz Kowalczyk, chief investment strategist with CFC Seymour
in Hong Kong.
"A global recession is unavoidable, volatility will
continue and there will be more losses in equity and credit
markets, but investors can focus on traditional fundamentals
rather than viability of the system," he said in a note.
Japan's Nikkei share average <> climbed 3.3 percent,
having now retraced a quarter of the steep decline in the last
month in the past few days.
The MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> rose 1.1 percent. The index remains down 18
percent so far in October and 50 percent in the year to date.
South Korea's benchmark KOSPI <> finished 0.95 percent
lower as scepticism about a government rescue plan ruined a
rally. The domestic market received a fleeting boost in
confidence after the government announced a $130 billion plan
on Sunday to stabilise its financial sector.
The Korean government said on Tuesday it was planning to
guarantee $100 billion worth of foreign currency debts owed by
18 banks, some of whom will be posting their quarterly results
in the next few weeks.
Hong Kong's Hang Seng index <> was largely unchanged,
but shares of CITIC Pacific <0267.HK>, the Hong Kong arm of one
of China's largest state-owned financial firms, plunged 46
percent after its surprise warning of potential foreign
exchange-related losses of nearly $2 billion.
LIBOR EASES, SO DO FEARS
The panic that ensued after short-term funding sources all
but dried up in the last month has faded but cautiousness
remains, especially with no government untouched by the grip of
the financial crisis.
The Saudi central bank poured between $2-$3 billion into
the banking system in the form of deposits to ease liquidity
pressures, its first direct injection of U.S. dollars in a
decade, bankers said on Tuesday.
London interbank offered rates, the international benchmark
for borrowing, have gradually fallen after the U.S. government
followed the lead of the UK and euro zone governments in taking
more direct measures to support the devastated bank industry.
In the last week, 3-month Libor has declined 69 basis
points to 4.06 percent, and its spread over the 3-month U.S.
Treasury yield has narrowed sharply by 171 basis points.
Those rates of course were coming off heightened levels but
the progress in taking lending markets off life support has
been well-received by equity markets as investors discount the
chance of a financial meltdown.
However, expectations that a global slowdown will hit
emerging markets hard and that the euro zone will need to step
up its support to member economies has continued to spur U.S.
investors to bring their money home, helping the dollar.
The U.S. dollar index <.DXY>, an instrument based on the
dollar's performance against a group of six other currencies,
edged up 0.1 percent to 83.07, just below a 16-month high of
83.23 hit on Monday.
The dollar slipped 0.3 percent against the yen to 101.60
yen <JPY=>, though remained above 97.88 yen, the lowest level
since March reached a week ago.
"The dollar's strength against major currencies despite the
rise in stocks and worries of another stimulus aggravating the
budget deficit shows demand remains strong to use the dollar to
settle finance needs," said Hiroshi Yoshida, a currency trader
at Shinkin Central Bank in Japan.
Short-dated U.S. government debt prices fell as borrowing
conditions improved. The 3-month Treasury bill yield
<US3MT=RR>, which moves in the opposite direction of price,
further rose to 1.27 percent, the highest since U.S. investment
bank Lehman Brothers collapsed in mid-September.
Most of the action in the Treasury market over the last
week has taken place in maturities of 1-year or less, causing
the difference between 3-month yields and 10-year yields, or
their yield curve, to shrink by more than a percentage point.
U.S. crude for November delivery <CLc1> rose for a third
day, climbing $0.32 to $74.57 a barrel after touching the
lowest since June 2007 on Thursday at $68.57. The November
contract expires at the end of Tuesday's global session.
(Additional reporting by Chikako Mogi in TOKYO)
(Editing by Kim Coghill)
