(Adds Chinese shares, updates prices throughout)
* Asian stock markets : tmsnrt.rs/2zpUAr4
* MSCI ex-Japan skids for a seventh day in a row
* Flight to safety boosts yen, bonds and gold
* Currency wars feared as China’s yuan breaks past 7 per dlr
* Markets wager on even sharper U.S. monetary easing
By Swati Pandey and Wayne Cole
SYDNEY, Aug 5 (Reuters) - Asian shares slid to 6-1/2-month lows on Monday and the yuan slumped to a more than decade trough as a rapid escalation in the Sino-U.S. trade war sent investors stampeding to traditional safe harbours including the yen, bonds and gold.
Markets have been badly spooked since U.S. President Donald Trump abruptly declared he would slap 10% tariffs on $300 billion in Chinese imports, ending a month-long trade truce. China vowed on Friday to fight back.
In response, China’s yuan burst beyond the psychological 7-per-dollar threshold in a move that threatened to unleash a new front in the trade hostilities - a currency war.
“Everything is selling off right now,” said Ray Attrill, head of forex strategy at National Australia Bank in Sydney. “We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness.”
“Our working assumption is that we are unlikely to see any meaningful resolution to the trade dispute anytime soon.”
Asian share markets were a sea of red with Japan’s Nikkei shedding 2.4% to the lowest since early June. It was the sharpest daily drop since March.
Australian shares slipped about 1.4% to spend their fourth straight session in the red, and South Korea’s Kospi tumbled 2.2% to hit its lowest since December 2016.
MSCI’s broadest index of Asia-Pacific shares outside Japan sank 2.1% to depths not seen since late January.
In China, the blue-chip index fell 0.8% while the troubled Hong Kong market hit a seven-month trough. The pain quickly spread globally, with E-Mini futures for the S&P500 and FTSE futures both down over 1%.
Oil prices were also pulled down again on demand worries, while gold climbed 0.65% to $1,450.41 an ounce.
The grim mood followed declines on Wall Street on Friday with MSCI’s gauge of world stocks posting its largest weekly loss of the year.
The trade dispute between the world’s two largest economies has already disrupted global supply chains and slowed economic growth.
The abrupt escalation capped a critical week for global markets after the U.S. Federal Reserve delivered a widely anticipated interest rate cut and played down expectations of further easing.
So far, investors are not buying Fed Chair Jerome Powell’s claim that the 25-basis-point rate reduction was a mere “mid-cycle adjustment to policy”.
Futures are now pricing in deeper cuts than before last week’s Fed meeting. The terminal U.S. rate is seen at 1.22%, 93 basis points below the current effective rate.
Analysts at TD Securities are forecasting no less than five more cuts from the Fed, amounting to 125 basis points of easing, over the coming year or so.
Bond markets were well ahead of the game as U.S. 10-year yields dived 7 basis points to 1.77%, a violent shift for usually cautious Asian hours. Yields in Australia and New Zealand touched all-time lows.
German 10-year government bond yields on Friday dropped to an all-time low of -0.502% and the country’s entire government bond yield curve turning negative for the first time ever.
The flight to safety lifted the yen, which often gains at time of stress thanks to Japan’s position as the world’s largest creditor. The dollar slipped to a seven-month trough of 105.78 yen, while the euro sank to its lowest since April 2017 at 117.64 yen.
That dragged the dollar index off 0.1%, though it was up against most other Asian currencies and those exposed to China or commodities including the Australian dollar.
The Aussie, a liquid proxy for emerging market and China risk, slipped to a fresh seven-month trough at $0.6748 after losing 1.6% last week.
The Swiss franc was also boosted by safe-haven demand from the escalating trade tensions. Trump is also eyeing tariffs on the European Union, but is yet to make any formal announcements. The euro was relatively steady on the dollar at $1.1119.
Sterling hovered near 2017 lows at $1.2159, pressured by concerns about Britain exiting the European Union without a deal in place.
The pound has been whiplashed since late last month when Boris Johnson, a figurehead for the “leave” campaign in the 2016 Brexit referendum, became the country’s prime minister.
Oil extended losses with U.S crude off 26 cents at 55.40 and Brent down 35 cents at $61.54.
Editing by Sam Holmes and Richard Borsuk