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Euro under a cloud in Asia, stocks sit on gains

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06/11/2014 | 08:51am CEST

The euro came under mounting pressure on Wednesday as the European Central Bank's embrace of negative interest rates encouraged flows out of the zone, while Asian shares consolidated near recent highs.

The single currency was slipping across the board as investors looked to borrow euros at super-low rates and buy higher-yielding assets abroad, the so-called carry trade.

"The chase for yield looks like it has further to run," said Shane Oliver, head of investment strategy at AMP Capital.

"The ECB’s actions provide a reminder global monetary conditions remain very easy which is supportive of relatively high yield assets and growth assets generally."

In contrast the dollar found support in a run of improving U.S. economic data which pushed up Treasury yields and stoked speculation the Federal Reserve might sound less dovish on policy when it meets next week.

That diverging outlooks shoved the euro down to $1.3536 and further away from a $1.3668 peak scored at the start of the week.

It also hit a seven-month trough on the higher-yielding Australian dollar and to near its lowest against the pound since late 2007.

Action in equity markets was more muted with many indices already having come a long way. MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.12 percent from a three-year peak.

The MSCI index of emerging markets has also been on a roll to reach its highest since May 2013, in part on speculation the ECB's increasingly aggressive easing will encourage fund flows to the emerging world.

Japan's Nikkei ended up 0.5 percent aided by MSCI's decision to remove South Korea and Taiwan indexes from its review list for reclassification to developed markets, keeping them in the emerging markets classification.

There had been speculation Tokyo equities would take the brunt of rebalancing if Korean and Taiwanese shares were reclassified to developed markets.

Moves had been minor on Wall Street with the Dow up 0.02 percent, while the S&P 500 down 0.02 percent and the Nasdaq Composite 0.04 percent firmer.

RISING YIELDS

The flow of U.S. data has been bright enough to soothe worries over the economy after a disappointing first quarter. Tuesday's releases showed small business confidence and job openings reaching heights not seen since 2007.

That in turn has led the futures market <0#FF:> to nudge forward the likely timing for a first rate hike from the Federal Reserve, though that is still well into 2015.

Likewise, U.S. Treasury yields have reversed decisively higher with 10-year paper paying 2.646 percent compared to a trough of 2.402 percent just two weeks ago.

"The bull moves in bonds that began early this year are now officially over," said William O'Donnell Treasury strategist at RBS Markets. "As such, I still expect cash 10-years to trade at 2.80 percent over the coming month."

The prospect of higher yields has offered some support to the U.S. dollar which held at 80.811 against a basket of currencies, a long way from May's low of 78.906.

Still, the broader moves were more about euro weakness than dollar strength. Sales of euros for yen, for instance, were sizable enough to push the yen up on the dollar. The euro fell to 138.44 yen and the dollar to 102.25.

The adoption of negative deposit rates by the ECB has sparked talk reserve managers at other central banks were trimming their euro holdings, and that the very low yields offered by peripheral euro zone debt was finally discouraging demand for the paper.

In commodities, gold was firm at $1,261.50 an ounce as a breakdown in strike talks in South Africa buoyed palladium and platinum.

Brent oil gained 21 cents to $109.73 a barrel, while U.S. crude prices added 12 cents to $104.47.

(Editing by Shri Navaratnam)

By Wayne Cole

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