SINGAPORE: Asian shares fell and bond yields spiked on nervousness about inflation on Thursday, while the yen's slide past 160-per-dollar had currency traders bracing for Japan to step in and steady it.
The dollar made six-week highs on sterling and the kiwi and at 160.7 yen traded just shy of Thursday's 38-year peak. The jittery mood had frothy sectors of financial markets especially vulnerable and Nasdaq futures dropped 0.5 per cent.
Shares in bellwether chipmaker Micron Technology slid 8 per cent in U.S. after-hours trade as it met rather than topped lofty revenue expectations. Japan's Nikkei fell 1 per cent.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.5 per cent, with some of the largest losses in Australia where rate sensitive stocks sank following Wednesday's data showing a surprise jump in inflation.
"Australia's inflation is broadly at the highest levels in the developed world now," said CommSec senior economist Ryan Felsman, with the market re-pricing risks of further hikes.
Australian three-year government bond yields had leapt 18 basis points on Wednesday, after inflation accelerated to a six-month high in May, and rose another 10 bps on Thursday to 4.21 per cent, tracking an overnight sell-off in U.S. Treasuries.
Swaps markets price about a 40 per cent chance Australia's central bank hikes rates by 25 bps in August, up from around 10 per cent before the inflation surprise.
Ten-year Australian government bond yields are above U.S. 10-year yields for the first time since February and the Australian dollar has been steady in the face of broad U.S. dollar gains elsewhere.
Australia's inflation surprise also follows a similarly unexpected jump in Canadian inflation and infused some extra nerves into markets awaiting the next reading of the Federal Reserve's preferred measure of U.S. inflation on Friday.
Later on Thursday U.S. GDP, European confidence figures, a speech from Australia's deputy central bank governor, and a rates decision in Sweden will be in focus ahead of the first U.S. Presidential debate.
YEN WATCH
In foreign exchange markets U.S. yields have supported the dollar, which touched a two-month high of 106.13 against a basket of currencies on Wednesday.
The dollar index is up 1.3 per cent for the month and almost 1.5 per cent for the quarter as expectations for rate cuts in the U.S. have been pushed back by stubborn inflation and strong economic data.
Benchmark 10-year U.S. Treasury yields rose 8 bps overnight and another 3 bps in Tokyo to 4.343 per cent for a rise of 15 bps for the quarter so far.
After falling overnight the New Zealand dollar dipped a further 0.1 per cent to a six-week low of US$0.6069 on Thursday and sterling nudged to a six-week trough of US$1.2613.
The yen, which slumped to a lifetime low 171.79 per euro on Wednesday was fragile at 171.57 in Asia and at 160.7 per dollar was weaker than levels which prompted Japanese intervention in April and May.
Japanese finance minister Shunichi Suzuki said he would not comment on levels on Thursday but reiterated that the government is concerned about the impact of the sliding yen on the economy and watching the currency market closely.
The yen is the worst performing G10 currency this year, down 12 per cent against the dollar. The slide adds pressure on the Bank of Japan to raise interest rates from near zero and loosen its grip on the bond market with speculation of a move lifting 10-year Japanese yields by 4 bps to 1.06 per cent.
In commodity markets Brent crude futures fell 0.4 per cent to US$84.92 a barrel, a 3 per cent drop for the quarter so far. Gold slipped as yields rose and traded at US$2,297 an ounce.
Wheat futures hovered near two-month lows on signs of a good U.S. harvest and improving weather in Russia.