February 18, 2015 / 11:44 PM / 3 years ago

Yields, dollar drop as Fed seen delaying hike

Passersby walk past an electronic board showing Japan's Nikkei share average (top R) and Asian countries' stock indexes outside a brokerage in Tokyo December 19, 2014.Issei Kato

SYDNEY (Reuters) - The U.S. dollar was nursing losses in Asia on Thursday while bonds held hefty gains as investors scaled back expectations on how fast, and how far, the Federal Reserve might raise interest rates in coming months and years.

Oil prices also tumbled anew as figures showed U.S. crude supplies had grown by five times more than forecast last week. U.S crude CLc1 prices were down $1.78 at $50.36 a barrel early Thursday, from a high of $53.41 the day before.

Equities were relatively calm with much of Asia on holiday, and MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was near flat.

Centres on holiday include China, Indonesia, Malaysia, Philippines, Singapore, Taiwan and South Korea.

Nikkei futures JNIc1 still pointed to an opening gain of over 100 points as the risk of an early tightening in the United States seemed to diminish. [TOP/CEN]

Yields on short-term Treasuries fell by the most since August 2011 after minutes of the Federal Reserve's last meeting showed "many" members wanted to keep rates near zero for longer.

"Our main takeaway from the minutes is that concern about downside risk to inflation has risen and, consequently, the bar for raising rates by June is higher than it was in December," said Barclays economist Michael Gapen.

The shift in expectations was given added impetus by a surprisingly sharp fall in U.S. producer prices which suggested the measure of core inflation followed by the Fed could slow to just 1.2 percent in January, further away from the central bank's target of 2 percent.

Investors responded by pushing out the timing of a first Fed hike <0#FF:> and by lowering the trajectory of rates for the next couple of years. Yields on two-year debt dived 7 basis points US10YT=RR while those on 10-year notes fell to 2.08 percent, from a six-week peak of 2.16 percent.

That in turn helped Wall Street recoup early losses and the Dow .DJI ended down a slim 0.1 percent. The S&P 500 .SPX lost 0.03 percent while the Nasdaq .IXIC added 0.14 percent.

Falling yields were not so positive for the U.S. dollar which gave ground to its major competitors. The dollar eased to 118.69 yen JPY=, from 119.26 before the Fed minutes were released, while the euro rose to $1.1403 EUR= from $1.1340.

Sentiment toward the single currency was also helped by signs Greece would ask on Thursday for an extension to its "loan agreement" with the euro zone as it risks running out of cash.

Financial markets had rallied after Athens said it would submit a request to extend the loan agreement for up to six months, hoping this signaled a last minute compromise to avert a bankruptcy and exit from the euro zone.

The biggest gainer in currencies was sterling which hit a seven-year high against the euro after data showed British wages growing strongly, outstripping inflation by the widest margin since before the financial crisis.

Sterling strengthened by more than 1 percent against the euro to 73.505 pence EURGBP=D4, while reaching a 1-1/2-month high on the dollar at $1.5478 GBP=D4.

Editing by Shri Navaratnam

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