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Asia: Shares rise as US interest rates ease, China steps up yuan defence

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[TOKYO] Asian shares recovered to four-week highs on Friday as a surge in the US dollar and its borrowing costs sparked by Donald Trump's election eased, with the US 10-year yield slipping to one-month lows.

The US dollar stayed near three-week lows against a basket of currencies though it bounced back a tad as the Chinese yuan gave up some of its massive gains made during the previous two days following Friday's midpoint fixing by China's central bank.

"The market appears to be on risk-on mode. It could be because of stabilising US yields. It could be signs of stability in Europe, or a recovery in oil. Anything that has been battered by higher US rates is coming back," Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

MSCI's gauge of the world's stock markets hit its highest levels in a year and a half, having risen 1.8 per cent since the start of year, helped by this week's generally upbeat economic indicators in the US and China.

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In Asia, MSCI's ex-Japan Asia-Pacific shares index rose 0.25 per cent to its highest in four weeks.

In contrast, Japan's Nikkei, one of the best performers since Republican Trump won the Nov 8 election, dropped 0.4 per cent as the yen gained versus the US dollar.

Mr Trump's victory had sparked a major realignment in markets.

Expectations that his administration will bring tax cuts, higher spending and deregulation have boosted US bond yields and the US dollar, to the detriment of many emerging economies that have benefitted from cheap US dollar funding and had attracted trillions of dollars from investors shunning low US yields.

"What's going on is a correction of the 'Trump trade' since the election. The markets have been trying to fully price in his policies just based on hopes," said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank in Tokyo.

"From now on, it's not going to be a simple one-way bet," he said.

Already under pressure from profit taking as the Trump rally wanes, the US dollar extended losses on Thursday as China stepped up efforts to support the yuan, sparking speculation that it wants a firm grip on the currency ahead of Mr Trump's Jan 20 inauguration.

The cost of borrowing the yuan in Hong Kong, the main offshore yuan trading centre, sky-rocketed, making it too costly for speculators to sell the yuan against the US dollar.

The offshore yuan gained more than 2 per cent in the last two sessions, their biggest two-day gain on record, to a two-month high of 6.7833 per US dollar before it eased back about 0.5 per cent in Asia on Friday to 6.8208.

The US dollar also slumped to a three-week low of 115.21 yen, having shed 1.6 per cent on Thursday, its biggest fall in five months. It bounced back 0.4 per cent on Friday to 115.80 yen.

The euro also posted its biggest gain in seven months, of 1.1 per cent, on Thursday and last fetched US$1.0588.

The US dollar's index against a basket of six major currencies tumbled to 101.30, falling more than two per cent from its 14-year high of 103.82 set on Tuesday.

Investors also rushed out of their selling positions in US bonds, one of the most convincing plays since the election because Mr Trump's policies are seen as stoking inflation.

The 10-year US Treasuries yield hit a one-month low of 2.344 per cent, having fallen about 30 basis points from its two-year high of 2.641 per cent touched on Dec 15.

Investors also scaled back their expectations of the Fed's rate hikes this year, with Federal Funds rate futures pricing in two rate hikes compared with two and a half at the peak in December.

Markets largely shrugged off US economic data published on Thursday which was generally strong.

The increase in private payrolls was on the weaker side of market expectations, however, raising some concerns about the upcoming jobs data due at 1330 GMT.

On Wall Street, the S&P 500 Index dipped 0.1 per cent as retailers such as Macy's and Kohl's slumped on weak holiday sales.

Financials were also hit by a fall in US bond yields but hi-tech shares, which have underperformed since Mr Trump's victory partly on concerns about his rocky relationship with Silicon Valley, shone.

The Nasdaq Composite rose 0.2 per cent to hit a record high, led by gains in online retailer

Oil prices held firm, supported by news that Saudi Arabia had cut production to meet Opec's agreement to reduce output.

International benchmark Brent crude futures stood at US$56.89 a barrel, flat on the day and up 3.1 per cent on the week.