IMF head's arrest adds to market woes

Hong Kong - Asian equities are on course for their biggest daily drop in two months and the dollar strengthened on Monday with further gains seen as renewed concerns of a possible euro zone debt restructuring prompted market players to reduce risk.

European shares are also expected to open lower, weighed down by the euro's weakness, according to financial spread bettors.

Having gained by more than 4% in less than two weeks, the dollar extended its biggest winning streak against a basket of currencies this year, helped by violent swings in commodities and troubles in the euro zone.

The euro fell as low as $1.4063, its lowest in six weeks, having dropped 5.9 percent from a 17-month peak of $1.4940 hit less than two weeks ago.

An unexpected complication for financial markets this week is the arrest on sexual assault charges of International Monetary Fund chief Dominique Strauss-Kahn.

Cooling demand for risky trades was also evident in commodity markets and Asian currencies, which weakened while safe-haven assets like US Treasuries and Japanese bonds advanced.

"Investors are risk-averse right now," said Jackson Wong, vice president of Tanrich Securities in Hong Kong. "Investors are unwinding their dollar carry trades, and it wouldn't be until probably next month that we see the dollar relenting."

Most stock markets in the region were in the red on Monday with Hong Kong and Jakarta leading losses as funds unwound their positions in resource-related stocks.

MSCI's index of Asia Pacific shares outside Japan was down 1.3%, extending a two-week decline and set for its biggest daily drop since mid-March.

Japan's Nikkei was down nearly a percent with banks among the main losers and Australia's benchmark index fell 1.2%.

While some large bids in the euro are strewn around the $1.4050 to $1.4000 region, just below that, from $1.3900 to $1.4000, is also an area where stop-loss orders are said to be lurking, according to traders.

A Greek official told Reuters that Strauss-Kahn's arrest "might definitely cause some delays in the short term," but would not change the IMF's policy on Greece.

A meeting of Eurogroup finance ministers, followed by an Ecofin meeting of EU finance ministers on Monday, could provide further direction for the euro.

Weighing on the euro has also been weakness in commodities with oil and gold softening after recent sharp volatility.

"The euro had been bought only because rising commodity prices were fueling expectations of more rate hikes in the euro zone. With commodity prices clearly running out of steam, there's no reason to buy the euro," said Daisuke Karakama, market economist at Mizuho Corporate Bank and a long-time euro bear.