By Kevin Plumberg
HONG KONG, May 28 (Reuters) - Asian stocks slipped on Wednesday, as a cloudy U.S. economic outlook and lingering inflation fears left investors skittish, despite a drop in oil prices below $129 a barrel, .
A rally in the U.S. dollar capped crude for now, although oil's 34 percent climb so far this year has raised fears about tighter consumer spending and business investment in the world's largest economy.
Government bond markets continued to show signs of weakness as investors unloaded positions built up during the height of the credit crisis and price in rising inflation. The benchmark yield on the 10-year U.S. Treasury note jumped about 7 basis points overnight after a reading of U.S. consumer inflation expectations surged.
"While oil prices have eased somewhat, they still remain high, and volatility in the foreign currency market is contributing to investors' uncertainty about the macroeconomic environment," said Lee Kyoung-su, a stock market analyst at Daewoo Securities.
"We saw a technical rebound yesterday after a week of losses, and it appears that gains will stop here for now," said Lee.
Japan's Nikkei share average <
> fell 0.2 percent and is down 9.6 percent this year but has remained in a narrow trading range throughout May.An MSCI index of stocks in the Asia Pacific region outside of Japan <.MIAPJ0000PUS> fell 0.4 percent, dragged down by the Australian stock market <
>, which sank 1 percent on losses at resource-related companies.Korea's KOSPI index <
> slipped 0.2 percent, weighed down the most by automaker Hyundai Motor Co <005380.KS> although gains technology companies such as Samsung Electronics <005930.KS> and LG Electronics <066570.KS> prevented deeper losses.The U.S. dollar was mostly steady against major currencies. The New York Board of Trade's U.S. dollar index was up slightly at 72.357 <.DXY>.
Repeated attempts to push the index below 70.0 in the last couple of months have come up empty, keeping oil prices from retesting record highs just above $135 a barrel.
The July contract for U.S. light crude <CLc1> settled at $128.25 on Tuesday, down around $4 on the day.
The euro was at $1.5685 <EUR=>, flat on the day. Against the yen, the dollar dipped 0.2 percent to 104.05 yen <JPY=>.
Japanese government bond prices edged up but the overall trend of higher yields remained. Amid thin volume, investors picked over the remains of a selloff that has sent the benchmark 10-year yield 40 basis points higher in the last three months.
June 10-year futures <2JGBv1> fell as low as 133.99, just above a nine-month trough of 133.93 hit on Friday, before rising 0.14 to 134.49.
The benchmark 10-year yield <JP10YTN=JBTC> eased 1 basis point to 1.750 percent, after rising as high as 1.785 percent to match its highest level since Aug. 9 hit on Tuesday.
"The JGB market took a cue from Treasuries, which fell despite a drop in oil prices. JGB market players are now testing to see if the 10-year yield will hit 1.8 percent," said Naomi Hasegawa, senior JGB strategist at Mitsubishi UFJ Securities.
Gold prices were steady after a 2 percent tumble on Tuesday. In the spot market, gold was at $907.30 <XAU=> an ounce after finishing at $904.80 the previous day. (Editing by Lincoln Feast)