US Dollar strengthens on hesitant Asian stocks as US non-performance data undermines Fed's rate cut expectations

By Ankur Banerjee

SINGAPORE (Reuters) - Asian stocks opened on a subdued note on Monday, with the dollar strengthening as investors weighed when the U.S. Federal Reserve would start cutting interest rates after another blowout jobs report.

Oil prices fell nearly 2% as tensions in the Middle East eased after Israel withdrew more soldiers from southern Gaza, while gold prices fell 1% after hitting a record high on Friday as U.S. Treasury yields continued to rise.

The Morgan Stanley Capital International (MSCI) broadest index of Asia-Pacific equities outside of Japan rose 0.26% and the Tokyo Nikkei Index rose 1%.

China's stock market reopened after an extended holiday on Thursday, with the blue-chip index down 0.5%. Hong Kong's Hang Seng Index rose 0.33%.

Wall Street's major stock indexes closed higher on Friday after data showed U.S. jobs grew more than expected in March and wages rose steadily, signaling the economy ended the first quarter on solid footing.

"The resurgence of economic data is a double-edged sword for markets," ANZ strategists said in a report." On the positive side, the resumption of growth suggests the economy is far from recession, but it could also mean the Fed will keep interest rates higher for longer."

CME Fed Watch tool shows that the current market pricing Fed rate cut in June the likelihood of 49.1%, July will become the much-anticipated easing cycle of the new starting point.

Investors also set this year's rate cut at 62 basis points, lower than the Fed's estimate of 75 basis points.

Investors' focus this week will be on the U.S. Consumer Price Index (CPI) report, which is expected to show that core inflation slowed to 3.7% in March from 3.8% in the previous month.

Kit Juckes, foreign-exchange strategist at Societe Generale, said the expected decline in core inflation is unlikely to revive the possibility of a rate cut in June, as last week's solid data weakened the likelihood of a cut.

"It's understandable that the market is expecting the曏 to cut rates in July rather than June.

Expectations for the changing outlook for U.S. interest rates boosted Treasury yields, with the two-year yield, which usually moves in tandem with interest rate expectations, rising 4.2 basis points to 4.774%, the highest in nearly four months.

The yield on the 10-year Treasury note rose by 4.4 basis points to 4.422%.

A rise in yields boosted the dollar, with the euro down 0.06% to $1.0829, while the pound last traded at $1.2622, down 0.11% on the day.[FRX/]

The yen fell 0.12% to 151.78 yen per U.S. dollar as traders were wary of possible intervention in Japan.

Standard Chartered Bank (Standard Chartered) Asia macro strategist Nicholas Chia (Nicholas Chia) said that if the U.S. CPI report is significantly stronger, the yen will be susceptible, "dry forecasting theory may be back on the agenda."

The U.S. dollar index, a measure of the greenback against six currencies, was at 104.35.

The European Central Bank (ECB) will meet later this week and is widely expected to keep interest rates steady. Investors believe the likelihood of a rate cut on April 11th is almost nil, but have fully factored in the possibility of a rate cut in June, which will be followed by two or three more cuts later in the year.

On the commodities front, spot gold fell 0.5% to US$2,317.09 per ounce, after breaking the all-time high last week. [U.S. crude oil fell 2.5%.]

U.S. crude fell 2.32% to $84.89 a barrel, while Brent crude was at $88.89, down 2.5% on the day.

Israel and Hamas sent teams to Egypt for a new round of talks on a possible cease-fire before the Eid holiday, easing tensions in the Middle East, which pushed oil prices up more than 4% last week on fears of supply disruptions.

(Reporting by Ankur Banerjee; Editing by Shri Navaratnam)