* Dollar below 85 yen; dealers on Japan intervention watch
* Government bond yields fall, Fed seen buying debt soon
* Gold near a record high hit on Tuesday
* Asia stocks up 0.7 pct but Nikkei wavers
By Kevin Plumberg
HONG KONG, Sept 22 (Reuters) - Expectations that the
Federal Reserve is moving closer toward printing more money to
support the U.S. economy lifted both stocks and bonds on
Wednesday, while the dollar fell to a six-week low against the
euro on a dwindling yield advantage.
Gold was in sight of $1,300 an ounce, having hit a record
high overnight after the Fed said it was ready if needed to add
more stimulus and that inflation was running below where it
would like it to be. []
Asia ex-Japan stocks <.MIAPJ0000PUS> rose 0.7 percent to a
near two-year high, though trading volumes were thinned out by
holidays, while U.S. stock futures <SPc1> climbed 0.5 percent.
The increasing possibility that the Fed will buy Treasuries
to stimulate demand lifted government bonds, while the prospect
of investors having access to even more cheaply borrowed money
supported riskier investments such as equities.
"The FOMC seems to be considering more bond purchases
predominantly because of concerns over deflation and not over
growth. In consequence, Asian risky assets should benefit from
the additional liquidity rather than suffering from weakening
prospects for regional exports to the United States," Dariusz
Kowalczyk, senior economist and strategist at Credit Agricole
CIB in Hong Kong, said in a note.
The falling dollar pushed up the yen <JPY=> and kept
traders on high alert for signs that Japan was intervening in
markets again to push its currency back down.
Japanese Prime Minister Naoto Kan said intervention in the
foreign exchange markets would be "unavoidable" if there was a
drastic change in the currency. He also told the Financial
Times in an interview that Tokyo planned a "total" package of
measures that would boost domestic demand and help to weaken
the currency. []
The dollar fell 0.3 percent against the yen to 84.87 yen
<JPY=>, just below where traders had thought Japan's central
bank would support it.
Japanese authorities intervened in currency markets last
Wednesday to weaken the yen for the first time since 2004, but
the dollar has met selling pressure from exporters around 86
yen. Tokyo has not been seen in the market since.
DOLLAR OUTLOOK DARKENS
The euro rose to $1.3310 <EUR=>, the highest since Aug 6,
while the dollar weakened across the board.
"I doubt the market will step back from selling the U.S.
dollar much for the time being until the U.S. data starts to
improve," said Greg Gibbs, currency strategist at Royal Bank of
Scotland in Sydney.
The relatively high yielding Australian <AUD=> and New
Zealand dollars <NZD=> outperformed other liquid currencies,
rising 0.3 percent and 0.4 percent, respectively, with dealers
focusing on the widening yield advantage of these countries
against U.S. bonds.
The 10-year U.S. Treasury future was up 0.3 percent <TYv1>
while in the cash market, the benchmark 10-year yield slipped 3
basis points compared with late on Tuesday in New York to 2.55
percent <US10YT=RR>.
The spread of the U.S. 10-year yield over the German
10-year yield has shrank to a negligible 8 basis points from
around 40 basis points only two weeks ago.
The Fed's statement increased expectations the Bank of
Japan could also ease policy further, pushing up Japanese
government bonds. The 10-year JGB future was up 0.3 point
<2JGBv1> in mid session trade.
Japan's Nikkei share average <> was largely unchanged
on the day, though it has risen around 9 percent so far in
September. Those returns were roughly level with the U.S. S&P
500 index but exceeded the FTSEurofirst 300's 5 percent gain.
The MSCI index of Asia Pacific stocks outside Japan
<.MIAPJ0000PUS> was at its highest since April 15. The index
has climbed 10 percent in September.
However, some Asian exchange-traded funds, which have been
receiving heavy inflows, may be near a peak.
"We believe inflows are likely to slow, as many of these
ETFs are now technically overbought. In addition, we expect
ETFs investing in Japan and Taiwan to continue to underperform
their Asian peers due to persistent outflows," TrimTabs
Investment Research said in a research report.
Equity trading volumes in Asia could be light on Wednesday
with markets closed in China, South Korea and Taiwan because of
public holidays.
Gold in the spot market was up 0.1 percent to $1,287.75 per
ounce <XAU=>, near an all-time high of $1,290.70 reached on
Tuesday. The precious metal has been driven by speculation that
with advanced economies still more likely essentially to print
money, inflation may not be too far off.
Crude oil futures <CLc1> drew support from the weaker
dollar to edge above $75 a barrel. []
(Additional reporting by Charlotte Cooper in TOKYO)
(Editing by Kim Coghill)
