Dollar shines, U.S. yields surge on upbeat U.S. data

TOKYO (Reuters) - The dollar stayed strong and U.S. bond yields held firm on Thursday after data showed solid U.S. economic growth, even as the Federal Reserve repeated its message that it is in no hurry to raise interest rates.

The prospect of a solid U.S. recovery underpinned equities, with Japanese shares leading the gains thanks to the yen's fall against the dollar.

The Nikkei average <.N225> rose 0.6 percent while both Australian and South Korean shares posted small gains. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was almost flat in early trade.

The U.S. April-June gross domestic product expanded at a 4.0 percent annual rate as activity picked up broadly, while reading for the first quarter was revised up to a contraction of 2.1 percent from an earlier estimate of a 2.9 percent drop.

"The data led markets to think that there's no need to be pessimistic about the U.S. economy," said Makoto Noji, senior strategist at SMBC Nikko Securities.

The GDP data increased expectations that the Fed is moving closer to an interest rate hike that many expect will occur next year if the economy continues to gain momentum.

The 10-year U.S. debt yield jumped to as high as 2.569 percent, posting its biggest daily rise since November. Two- and three-year note yields rose to their highest in three years.

The U.S. dollar index rose above two of its recent peaks -- one hit in January and the other in November -- to hit its highest level in almost 11 months. The index rose to as high as 81.545 <.DXY> on Wednesday and last stood at 81.420, having risen 2.0 percent this month.

The U.S. currency broke above its long-held range against the yen to hit a four-month high of 103.15 yen on Wednesday. It last stood at 102.85 yen .

The euro also fell to eight-month low of $1.3366 and last fetched $1.3395.

INFLATION

As widely expected, the U.S. Federal Reserve cut its monthly asset purchases to $25 billion from $35 billion, leaving it on course to end the programme this autumn.

While the Fed also reiterated its concerns over slack in the labour market, it upgraded its assessment of the U.S. economy and expressed some comfort that inflation was moving up toward its target.

That stood in contrast with the euro zone, where data showed on Wednesday Spanish consumer prices fell 0.3 percent in July, faster than an expected 0.1 percent fall, keeping pressure on the ECB to adopt full-scale quantitative easing.

As signs of disinflation mounted, euro zone bond yields kept falling, with Italian and Spanish 10-year debt yield both hitting record low of 2.625 percent and 2.451 percent respectively.

In addition, there are concerns that the euro zone economy might by a loss of trade with Russia after the European Union and the United States imposed further economic sanctions on Moscow.

Oil prices eased, with U.S. crude futures hovering at $99.53 per barrel, near 2 1/2-month low of $99.01 hit in mid-July, pressured by excess supplies in Europe and Asia despite continued hostilities in Gaza and Ukraine.

Elsewhere, Argentine is on the brink of a default as it failed to strike a deal to avert its second default in more than 12 years after talks with holdout creditors ended without a settlement.

But the broader impact of any default is likely to be limited because Argentina has been effectively shut out of financial markets since its devastating debt default in 2002.

(Editing by Eric Meijer)

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