Asia shares drop, dollar firm; data supports expectations for Fed hike

By Hideyuki Sano and Nichola Saminather

TOKYO/SINGAPORE (Reuters) - Asian shares fell and European markets were set to follow suit on Thursday, while the dollar held firm after strong U.S. data and comments from a Federal Reserve governor fanned expectations of an interest rate hike in September.

Dollar-denominated MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) slid 0.8 percent at 0606 GMT.

Financial spreadbetters expected Britain's FTSE 100 (FTSE) to open down by 39-41 points, or 0.6 percent lower.

The Bank of England is likely to say on Thursday that its policymakers were split over interest rates, raising expectations that it is heading for its first increase in rates in nearly a decade.

Germany's DAX (GDAXI) was seen opening down by 43-54 points, or 0.4-0.5 percent lower, while France's CAC 40 (FCHI) was expected to open down by 25 points, or 0.5 percent lower.

Jonathan Sudaria, dealer at Capital Spreads in London, said traders were wary wWith so much data pointing in different directions, yet central banks looking firmly intent on taking their first steps along an interest rate hike cycle.

"Traders are understandably treading cautiously," he wrote in a note to clients.

The Shanghai Composite Index (SSEC) lost almost 1 percent, after news China's banking regulator estimated that banks' bad debts had jumped 35.7 percent from a year earlier to 1.8 trillion yuan($289.92 billion) as of the end of June.

Japan's Nikkei (N225) index, the only Asian market in positive territory, pared gains to 0.2 percent, on China's losses. South Korea's Kospi slid 3.1 percent.

Australia's S&P/ASX 200 index (AXJO) lost 1.2 percent, after the unemployment rate climbed to 6.3 percent in July, even as employment jumped by 38,500 since June.

Overnight, Wall Street shares mostly edged higher, helped by both data showing U.S. service sector growth surged to a decade high in July, and by solid corporate results in Europe.

The U.S. Institute for Supply Management's services sector index rose to 60.3, its highest level since August 2005, far beyond expectations for a 56.2 reading.

The data supported expectations that the Federal Reserve will raise rates in September, more than offsetting weaker-than-expected U.S. private hiring figures for July also published on Wednesday.

Atlanta Fed chief Dennis Lockhart, a voting member at the U.S. central bank's policy committee, also said it would take "significant deterioration" in the U.S. economy for him to not support a rate hike in September.

"Lockhart is not a policy hawk. He is always right at the middle of the road in the policy board," said Tomoaki Shishido, fixed income analyst at Nomura Securities. "As far as I remember, his cue on the Fed's policy in the past has proved almost always right."

In light of Lockhart's comments, U.S. employment data due on Friday may do little to change perceptions unless it misses market expectations by a huge margin.

The dollar's three-month overnight indexed swap rate hit its highest level since 2010 on Wednesday.

The spectre of higher U.S. interest rates benefited the dollar against other currencies, lifting the dollar's index against a basket of six major currencies to a 3 1/2-month high of 98.218 (DXY) <=USD>. The index last stood at 97.712.

The U.S. currency cleared strong resistance around 124.50 yen to hit a two-month peak of 125.015 yen on Wednesday. It last stood at 124.73.

The euro also slipped to two-week low of $1.0847 on Wednesday before bouncing back to $1.0923.

"The focus for now would be how risk assets such as emerging currencies and stocks will cope with the prospects of a U.S. rate hike," said Minori Uchida, chief currency strategist at the Bank of Mitsubishi-Tokyo UFJ.

Investors are worried that weaning off decade-long zero interest rates on the dollar could prove tough for some emerging economies and companies that have taken cheap dollar funding for granted.

The Brazilian real hit a 12-year low and the South African rand hit a 14-year low on Wednesday. In Asia, the Indonesian rupiah and the Malaysian ringgit flirted with the lowest levels since the Asian economic crisis in the late 1990s.

Elsewhere in the markets, few investors seemed worried about U.S. share moves. U.S. shares' volatility index (VIX), seen as a measure of investors' anxiety, briefly fell below 11 percent, its lowest level in more than a year.

Elsewhere, oil prices hovered near multi-month lows after a surge in gasoline stores in the United States.

Brent futures , the global oil benchmark, hit $49.02 per barrel, its lowest since late January.

London copper rose 0.5 percent as Chinese data underpinned industrial metals, although gains were capped by a stronger dollar.