The Australian sharemarket has slumped to its greatest daily loss in seven weeks, joining a sea of red in Asia as fears grow of a US government shutdown amid political deadlock.
The battle between US lawmakers over the budget prompted heavy selling in the region, with the ASX/S&P 200 Index closing 1.67 per cent lower to 5218.9 points.
The Nikkei 225 closed 2.06 per cent lower, South Korea's Kospi ended trade 0.74 per cent down, while Hong Kong's Hang Seng was 1.44 per cent weaker late on Monday. Shares in London opened 1 per cent lower.
A possible short-term shutdown was expected to have "modest macro-economic effects", with a two-day halt in government activities forecast to shave an annualised rate of 0.1 percentage points off US fourth-quarter growth, brokerage Goldman Sachs said on Monday.
The threat of a shutdown also foreshadowed future political tussles over the debt ceiling, which is seen as a greater risk for global financial markets than the budget battle.
The Australian dollar lost ground, falling to US92.81¢ on Monday morning as investors shied away from risky assets amid the uncertainty. The currency slipped again after weaker than expected Chinese manufacturing data renewed concerns of an economic slowdown. It was buying US93.06¢ late on Monday.
Australian 10-year government bond yields were also weighed down, falling to as low as 3.76 per cent on Monday morning after closing last week at 3.88 per cent.
Yields on three-year Commonwealth government securities followed suit, falling from a close of 2.76 per cent on Friday to 2.67 per cent early on Monday.
The local currency's slide came ahead of the RBA's monthly meeting on Tuesday, with some economists expecting the central bank's board to be more vocal in its statement about the need for the dollar to weaken further as Australia rebalances away from mining-led growth.
The Australian dollar was trading around US90.03¢ during the Reserve Bank's previous meeting on September 3, but edged higher before surging more than US1.5¢ after the Fed's decision to delay tapering its bond-buying program.
The currency reached a three-month high of US95.24¢ on September 19.
While the renewed vigour in the dollar was seen as a point of frustration for the central bank, the RBA was widely forecast to keep the cash rate on hold at a 60-year low of 2.5 per cent as activity picked up in the housing sector.
"I think they will be quite happy to sit where they are for several months," BT Financial chief economist Chris Caton said. "Something has to happen dramatically - to the exchange rate or to the unemployment rate - to push them to another rate cut. On the other side of the coin, now they do have something of a worry about house prices. Housing is not in a bubble in Australia, but 15 or 20 per cent from now, it could be."
Credit growth in the private sector remained subdued, rising by 0.3 per cent in August despite expectations a busy property market would fuel increased borrowing, RBA figures released on Monday showed.
Housing credit grew modestly at 0.4 per cent, the same level of monthly growth since January. It took the increase over the past 12 months to 4.7 per cent — the strongest lift since last September.
TD Securities-Melbourne Institute's monthly inflation gauge, also released on Monday, saw the headline reading rise 0.2 per cent in September to reach a yearly gain of 2.1 per cent, near the bottom of the Reserve's 2 to 3 per cent target.