Asia stocks take fright on Fed anxiety, dollar shines

By Hideyuki Sano

TOKYO (Reuters) - Asian shares tumbled on Wednesday as markets wagered the Federal Reserve would raise interest rates earlier than expected, sending U.S. bond yields higher and keeping the dollar well bid near 14-month highs against a basket of major currencies.

Some of the regional tech shares took a hit after Apple Inc stock (O:AAPL) fell as the initial excitement over its announcement of new products including a watch, larger iPhones and a mobile payment service, quickly evaporated.

Japan's Nikkei dropped 0.4 percent (N225) while MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) slipped 1.1 percent. If sustained, it would mark the largest fall for the regional index in nearly six months.

On Wall Street, Apple's decline and higher bond yields pushed stocks down. The S&P 500 (SPX) lost 0.7, the Dow (DJI) fell 0.6 percent and the Nasdaq Composite (IXIC) dropped 0.9 percent.

The dollar remained well bid after economists at the San Francisco Fed shocked markets by publishing a paper saying investors expects a slower rate hikes than the U.S. policymakers themselves expect.

Predictably, the research ramped up expectations the Fed could signal an earlier-than-expected hike in rates at their policy-setting meeting on September 16-17.

"The markets had probably become too complacent about the Fed keeping rates low for a long time because of the Ukraine crisis and so on," said Makoto Noji, senior strategist at SMBC Nikko Securities.

The dollar's index against a basket of major currencies <.DXY> rose as high as 84.519 on Tuesday, not far from the July 2013 peak of 84.753. A break there will take it to levels not seen since July 2010. It last stood at 84.136.

The euro fell to a 14-month low of $1.2860 on Tuesday before rebounding to trade at $1.2933. The greenback rose to a six-year high of 106.475 yen and last traded at 106.26 yen.

The spectre of rising U.S. interest rates dented higher-yielding currencies that had attracted investors seeking bigger returns.

The Australian dollar hit a 5 1/2-month low of $0.9168 on Wednesday.

As the dollar rose, gold prices hit a three-month low of $1,247.15 per ounce on Tuesday and last stood at $1,255.19 .

U.S. bond yields also climbed as investors reassessed the Fed's rates outlook, with the 10-year yield hitting a five-week high of 2.509 percent (US10YT=RR). It was at 2.493 percent in early Asian trade on Wednesday.

The rate-sensitive two-year yield rose to 0.560 percent (US2YT=RR), near its three-year peak of 0.590 percent hit in late July.

(Editing by Shri Navaratnam)