* Dollar below 85 yen; dealers on Japan intervention watch
* Government bond yields fall, Fed seen buying debt soon
* Gold hits record high on way to $1,300/ounce
* Asia stocks up 0.7 pct but Nikkei dips
By Kevin Plumberg
HONG KONG, Sept 22 (Reuters) - Expectations that the
Federal Reserve is closer to printing more money to support the
U.S. economy lifted stocks and bonds on Wednesday, while the
dollar hit 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 in the wake of the Fed's statement that it was ready if
needed to add more stimulus and that inflation was running
below where it would like it to be. []
Major European stock markets <><><>FCHI> edged
higher in early trade, following gains in most of Asia, while
U.S. stock futures <SPc1> climbed 0.3 percent, pointing to a
stronger opening on Wall Street later in the day.
Asiam stocks outside Japan <.MIAPJ0000PUS> rose 0.7 percent
to a near two-year high, though trading volumes were thinned
out by holidays.
The Fed's comments overnight increased the possibility that
it will buy Treasuries, pushing up government bond prices.
The prospect of quantitative easing, a policy-driven
expansion of money supply, also fueled expectations that
investors will have access to even more cheaply borrowed money
to buy riskier assets such as equities.
"The big beneficiary of more QE will be Treasuries," said
Andrew Pease, senior investment strategist with Russell
Investments in Sydney.
"The goal of QE will be to reduce long-term yields. The
U.S. dollar is likely to weaken and it should eventually be
positive for equities once investors have confidence that QE
will reflate the economy," he said.
The falling dollar pushed up the yen <JPY=>, sending the
Nikkei share average into the red, and kept traders on high
alert for any 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 0.2 percent against the yen to 84.92 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 0.6 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 0.1 percent <TYv1>,
while in the cash market the benchmark 10-year yield slipped a
basis point compared with late on Tuesday in New York to 2.57
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 <> finished 0.4 percent
lower on the day, though it has still risen around 8 percent so
far in September. Those returns were roughly level with the
U.S. S&P 500 index and 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 0.3 percent at $1,290.35 per
ounce <XAU=>, after reaching an all-time high earlier of
$1,291.85. 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, rising 50 cents to $75.47 a barrel. []
(Additional reporting by Charlotte Cooper in TOKYO)
(Editing by Kim Coghill)
