* In wake of Fed, Bank of Japan seen cutting rates on
Friday
* U.S. bond yields rise from record lows, JGB yields sink
* Automaker stocks fall with industry woes deepening
(Recasts, updates prices)
By Kevin Plumberg
HONG KONG, Dec 17 (Reuters) - The U.S. dollar dropped to an
11-week low and government bonds rose on Wednesday after the
Federal Reserve slashed rates, paving the way for Asian
policymakers to take more aggressive steps to support growth.
Stock markets in Japan and South Korea fell, with shares of
car manufacturers under fire on faded hopes of an imminent U.S.
auto industry bailout, overshadowing strength in sectors
sensitive to interest rates.
U.S. Treasuries slid after a sharp rally overnight, but
Japanese government bonds climbed, pushing down the 2-year
yield to the lowest since February 2006, on growing speculation
the Bank of Japan would cut the overnight cash rate from its
current low level of 0.3 percent as early as Friday.
Government bonds rallied after the Fed also said it would
use unconventional means to revive the U.S. economy from a deep
recession, including buying long-dated Treasuries, as other
central banks were expected to slash their benchmark rates,
ushering in an unprecedented era of cheap money.
"This opens the door for more rate cuts in Asia. Everyone
is now looking at the Bank of Japan, which may feel compelled
to cut rates for some symbolic gesture," said David Cohen,
director of Asian economic forecasting with Action Economics in
Singapore.
"The Fed has emphasised the further deterioration of their
economy. A similar situation holds in Asia, so central banks
will have some motivation to cut rates further."
Prospects for lower borrowing costs helped to lift the MSCI
index of stocks in the Asia-Pacific region outside Japan
<.MIAPJ0000PUS> to the highest since Nov. 11, up 2.3 percent on
the day and extending its gains this month to 10.2 percent.
However, Japan's Nikkei share average <> shed early
gains and slipped 0.5 percent, led by a 7 percent drop in Honda
Motor Co <7267.T>. Strength in the yen also walloped exporter
stocks already facing weak global demand.
Honda, Japan's No.2 automaker, was poised to issue its
third profit warning in five months, citing huge currency
losses and tanking car sales. Automakers everywhere are reeling
from a sharp downturn in sales due to a global recession and
tight credit, and are under pressure to delay investments and
expansion plans.
Hong Kong's Hang Seng index <> climbed 0.9 percent,
boosted by property-related stocks such as Sun Hung Kai
Properties <0016.HK> on hopes for lower borrowing costs.
In an all-out battle to protect the U.S. economy from
profit-evaporating deflation, the Fed explicitly said it would
take steps to make sure benchmark rates remain low for some
time and to keep its balance sheet loaded with debt.
DOLLAR RALLY LOOKS MATURE
The prospect of effectively littering the financial system
with dollars kept the U.S. currency struggling. The rally it
enjoyed earlier this month on the back of U.S. investor capital
flows back home has clearly faded.
"You are starting to move away from dollar-positive signals
and dollar-bullish signals we've had over recent months," said
Dwyfor Evans, currency strategist with State Street Global
Markets in Hong Kong.
"People are getting a little concerned with the whole idea
of quantitative easing. To the extent that means simply
throwing more dollars on to the market, then that implies a
weakness in the currency," he said.
The euro rose more than 1 percent to $1.4160 <EUR=>. So far
this month, the euro has strengthened by around 14 cents as
dealers close out bets on the dollar as the year-end
approaches.
The dollar fell 0.7 percent against the yen compared to
late U.S. trading to 88.45 yen <JPY=>, creeping back down
toward a 13-year low of 88.10 yen hit late last week.
Commodities were boosted by a weaker dollar, with copper
futures edging higher and oil <CLc1> rising to above $44 a
barrel on expectations OPEC will cut supplies further.
BOND YIELDS STAY LOW
Data reflecting a worsening global economic recession have
kept demand for government bonds high, especially heading into
the year-end. However, expectations that other central banks
will follow the Fed's lead and aggressively cut rates as well
as pour liquidity into particular areas desperate for cash has
increased hunger for government paper.
The benchmark 10-year Japanese government bond yield
<JP10YTN=JBTC> dropped 7.5 basis points to 1.29 percent, the
lowest since mid-April.
The 2-year yield dropped to the lowest since February 2006,
shrinking the advantage of 2-year U.S. Treasury yields over
Japan's to 21 basis points. On Tuesday, the spread was the
lowest since 1992, according to Reuters data.
U.S. Treasuries sold off in Asia, but only after yields hit
record lows overnight in the wake of the Fed's actions.
The 10-year note <US10YT=RR> yield edged up to 2.28 percent
after hitting 2.26 percent on Tuesday, the lowest since 1951,
according to Global Financial Data. The yields on 2-year and
30-year U.S. paper fell to record lows.
Given the moves in U.S. yields, some investors were moving
back to the short end of the yield curve from longer
maturities.
"The Fed will have to continue to focus on the more
innovative forms of monetary stimulus," said Mike Zelouf,
product specialist at Western Asset Management, a part of Legg
Mason.
"With Treasury yields at historic lows, and potentially
trillions of dollars of new government issuance in the
pipeline, it is appropriate to reduce durations in the U.S.
back to or even slightly below benchmark levels with an
emphasis on shorter-dated yields," he said in a note.
