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Oil dives to new depths, rush to safety aids yen

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange
Oil prices plummeted to five-year lows on Tuesday, pressuring commodity-linked currencies and most Asian shares as a bout of risk aversion rippled through world markets.

The urge for safety gave a rare boost to the Japanese yen which notched up particularly large gains on the beleaguered Australian and New Zealand dollars.

Much of the action was in oil where a glut of supply has sen prices fall for almost six months now, so pressuring energy stocks and commodity-related assets globally.

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Brent crude shed 86 cents to $65.33 a barrel, while U.S. crude futures lost another 70 cents to $62.35. Both had already tumbled more than 4 percent on Monday on expectations that a deepening oil glut would keep prices under pressure into the new year.

Oil prices are likely to remain around $65 a barrel for the next six to seven months until the global economy recovers or OPEC changes its production policy, the head of Kuwait’s state oil company said.

While falling energy prices are a boon for consumer spending power in much of the world, it was bad news for resource stocks like Australia’s Santos which shed almost 8 percent.

The pain spread across the main Australian share index which skidded 1.5 percent , while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8 percent to a seven-week trough.

Japan’s Nikkei eased 0.7 percent, but that follows a run of hefty gains which took it to the highest since mid-2007.

Chinese shares have also been on a tear and Tuesday was no different as the CSI300 index powered up another 3 percent to peaks last visited in April 2011. It has now climbed by a third in just three weeks.

On Monday, the Dow had lost 0.59 percent, while the S&P 500 fell 0.73 percent and the Nasdaq 0.84 percent.

In currency markets, the yen benefited as nervous speculators cut back on short positions. The dollar faded to 120.19 yen <JPY=>, and away from Monday’s high of 121.86, while the euro retreated to 148.00 <EURJPY=>.

The Australian dollar was a major loser, reflecting the country’s position as a major commodity exporter, and slid a full yen to 99.11 <AUDJPY=R>.

Not helping risk appetite was a Wall Street Journal report that Fed official were seriously considering dropping an assurance that short-term interest rates will stay near zero for a “considerable time”.

Such a move would be taken as a sign the central bank was on target to start raising interest rates around the middle of next year, a view that has gained great traction since last week’s surprisingly strong payrolls report.

Yields on two-year Treasury debt <US2YT=RR> has spiked to highs not seen since April 2011 while the whole yield curve has flattened markedly as investors wager Fed action will keep inflation low over the long run.

The lack of inflationary pressure combined with a rising U.S. dollar kept gold on the back foot. Spot prices <XAU=> were stuck at $1, 200 on Tuesday after shedding a couple of bucks the previous session.

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