Asia shares hit 2007 top, dollar skids on Fed inflation tweak

By Wayne Cole

SYDNEY (Reuters) - Stocks, bonds and commodities were all on a roll in Asia on Thursday, as bulls scented a softening in the Federal Reserve's confidence on inflation that promised to keep U.S. interest rates low for longer than some had expected.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) climbed 0.9 percent to heights not seen since December 2007. It has gained over 5 percent so far this month.

South Korea (KS11) and Japan's Nikkei (N225) both added 0.2 percent, while Australia (AXJO) put on 0.3 percent. Stocks in the Philippines (PSI) were at a one-year peak and Hong Kong's Hang Seng index (HSI) added 0.3 percent to push above 27,000.

But worries about tighter regulations nudged China's blue-chip CSI300 index (CSI300) down 0.7 percent, though data showed a pick up in profit growth for industrial firms.

The latest rush for risk came after the Fed left U.S. rates unmoved as expected on Thursday, and tweaked its wording on inflation.

The market seized on the fact that the central bank noted that both overall and core inflation had declined, and it removed the qualifier "recently," perhaps suggesting concerns the slowdown might not be temporary.

The Fed also said it expected to start winding down its massive holdings of bonds "relatively soon," cementing expectations of a September start.

While that would be an effective tightening in financial conditions it might also lessen the need for actual hikes in rates, which matter more for currency valuations.

"The dollar's biggest problem is it can't expect help from the Fed for a long time," said Alan Ruskin, global head of forex at Deutsche.

"In the short-term we are still in a risk-favourable loop, whereby subdued goods and services inflation supports a well behaved bond market and asset inflation. It's just another day in paradise."

A Reuters poll showed most primary dealers, the banks authorized to trade directly with the Fed, still see the Fed's next rate rise in December. But Fed funds rate futures are pricing in less than 50 percent chance of a hike by then, compared to more than 50 percent before the Fed's meeting.

DOLLAR BREAKS LOWER

Yields on U.S. 10-year benchmark U.S. Treasuries fell 5 basis points and were last at 2.278 percent (US10YT=RR). The dollar followed, falling to a 13-month trough against a basket of currencies of 93.322 (DXY).

The euro, which had been bumping up against a 23-month top for most of the week, finally broke through to reach $1.1750 , its highest since January, 2015.

The next major chart target was the 200-week average at $1.1807 - a measure the euro has not traded above since August 2014.

The dollar was fast approaching the 200-week barrier on its Canadian counterpart, and had breached that technically important level on the Australian dollar .

The dollar even fell back against the yen to 110.875 , though the damage was somewhat limited by expectations the Bank of Japan would keep its super-easy policies in place longer than most other global central banks.

The prospect of U.S. policy staying stimulative saw Wall Street's fear gauge touch a record low (VIX) as stocks notched record closing highs. The Dow (DJI) ended Wednesday up 0.45 percent, while the S&P 500 (SPX) added 0.03 percent and the Nasdaq (IXIC) 0.16 percent. (N)

The declining U.S. dollar boosted commodities priced in the currency. Spot gold hit a six-week high and was last trading at $1,263.80, while copper reached territory not trod since May 2015. [MET/L]

Oil prices neared eight-week highs as a surprisingly sharp drop in U.S. inventories encouraged speculation a global crude glut would recede. [O/R]

A bout of profit-taking in Asia on Thursday saw Brent crude futures (LCOc1) ease 6 cents to $50.91 a barrel, while U.S. crude (CLc1) dipped 7 cents to $48.68.