Dollar defensive after soft data, bond rout resumes

SYDNEY (Reuters) - The U.S. dollar huddled near three-month lows on Thursday after poor retail data proved a huge disappointment to those expecting a strong economic rebound from a weather-weakened first quarter.

Investors reacted by pushing back the likely lift-off date for a rate hike by the Federal Reserve, giving gold a steer to five-week highs above $1,218 an ounce .

Yet in a bizarre turn, German and U.S. bond yields still surged to their highest in over five months as a vicious selloff extended to its tenth session.

"Global rates markets have seemingly nowhere to hide," said Bill O'Donnell, head of Treasury strategy at RBS. "Rates flows illustrated that the resolve of sellers is still unyielding."

The startling rise in yields has made equities look more expensive in comparison to debt and kept Asian share markets subdued. Japan's Nikkei <.N225> eased 0.4 percent early Thursday, as did Australian stocks <.AXJO>.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was virtually flat.

On Wall Street, the Dow <.DJI> had ended Wednesday down 0.04 percent, while the S&P 500 <.SPX> lost 0.03 percent and the Nasdaq <.IXIC> added 0.11 percent.

Moves were far wilder in bond markets.

Yields on German 10-year paper jumped to 0.727 percent, the highest close since early December, having been as low as 0.599 percent at one stage on Wednesday.

The selling spilled over into markets globally, with 10-year Treasury yields also ending at five-month highs. That performance was all the more bearish given an auction of new paper had drawn strong demand during the session and the data were so disappointing.

Headline retail sales were unchanged in April as autos and fuel fell back as expected, but what really hurt was that other sectors failed to bounce. The core control measure of sales favored by economists was flat in the month, completely confounding forecasts for a healthy rise of 0.5 percent.

Investors reacted by pushing back the likely lift-off date for a hike by the Federal Reserve. While Fed officials keep insisting that a hike could come from June onward, markets are not convinced it will be able to move at all this year.

December Fed fund futures <0#FF:> surged to close at contract highs, implying a rate of just 31.5 basis points. With the current effective rate around 12 basis points, futures are not even fully priced for a single quarter point hike.

With higher rates seeming ever more distant, investors bailed out of long U.S. dollar positions and took its index down to 93.697 <.DXY>, bringing losses to nearly 7 percent from a 12-year peak of 100.390 set in March.

Against the yen, the greenback slid to a two-week trough of 119.03 , while the euro came within a whisker of a two-month peak of $1.1392 set last week. It last stood at $1.1349.

A star performer was the New Zealand dollar which flew higher after domestic data on retail sales blew away all expectations with a record rise of 2.7 percent.

The kiwi was up at $0.7552 , a dramatic turnaround from a two-month trough of $0.7318 hit earlier in the week.

In commodity markets, oil gave back a little of its recent hefty gains. U.S. crude futures were off 40 cents at $60.10 a barrel, while Brent lost 25 cents to $66.56.

(Editing by Shri Navaratnam)

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