* 10-year U.S. yield unable to reach 3.60 pct, backtracks
to 3.44
* This December is typical for markets: messy and trendless
* Advanced market stocks outperforming emerging in quarter
* U.S. Congress passes tax cut extension bill
(Updates with Japan close, comments, context)
By Kevin Plumberg
HONG KONG, Dec 17 (Reuters) - The U.S. dollar fell on
Friday, struggling for support as a rapid rise in U.S. bond
yields ebbed, while Asian stocks clawed higher after two days
of declines.
Benchmark 10-year U.S. Treasury yields held at 3.44
percent in Asia and futures rose after a push overnight
towards a seven-month high close to 3.6 percent enticed bond
buyers back into the market, confounding investors hoping for
a trend to cling to in the final weeks of 2010.
December's reduced trading volumes and holidays typically
cause whippy price action and make big bets difficult to hold
for long.
Still, stocks in advanced markets were poised to keep a
year-end rally going, even though Japanese equities
unofficially closed marginally lower.
The Nikkei share average edged down 0.1 percent
but was still up 10 percent in the final quarter of the year.
It was on course for its biggest quarterly rise since the June
quarter of 2009, lifted by foreign investors hoovering up
cheap shares.
Japan's gains have contributed to the 6.7 percent rise of
the MSCI all-country world index , which
exceeded the 3.8 percent advance of the emerging markets index
.
Year-to-date, the U.S. S&P 500 index is up 11.5 percent
compared with 11.9 percent for the MSCI Asia-Pacific
ex-Japan index and 8.7 percent for the MSCI world index.
If the S&P were to end the year outperforming the MSCI
Asia ex-Japan index, it would be first time that that had
happened in a non-crisis year since 2000.
REVERSAL OF FORTUNE
The outperformance of developed markets has been a
reversal of a trend in place for most of the year: the
fundamental strength of emerging markets drawing money from
advanced economies.
That is not to say the outlook for emerging markets,
particularly in Asia, is anything but bright.
"Loose monetary policy in the U.S., debt concerns in
Europe and strong growth in Asia coupled with rising
inflationary pressures should maintain the status quo of Asian
currency strength in 2011," Commerzbank analysts said in a note.
For now though clear signs of improvement in the U.S.
economic outlook have taken some gloss off of developing
markets.
After two days of falls, the MSCI index of Asia Pacific
stocks outside Japan rose 0.4 percent on
Friday, with gains evenly spread across the sectors.
Momentum-driven investors helped South Korean and
Taiwanese stocks lead the small regional gains, with benchmark
indexes climbing 0.8 percent and 0.6 percent ,
respectively.
Ten-year U.S. Treasury futures expiring in March 2011 were
up 10/32 <TYc2> after a late session rally overnight in the
cash market.
The 10-year yield of 3.44 percent was
unchanged from late New York, but down from a 7-month high of
3.57 percent reached on Thursday.
Strategists generally have a negative view on government
bonds in 2011 and expect the asset class to underperform based
on increased investor appetite for risk and fading deflation
fears.
Adding to that view, the world's biggest bond fund, PIMCO
Total Return Fund, may start investing up to 10 percent of its
assets in equity-related securities. []
The U.S. Congress passed a bill extending $858 billion of
tax cuts, sending it to President Barack Obama for final
signing.
The bill introduced last week sparked upward revisions of
both U.S. growth estimates and budget deficit forecasts,
triggering the sharp rout in U.S. Treasuries. []
The U.S. dollar index, a measure of performance against
six other currencies, slipped 0.3 percent . Despite a 63
basis point rise in 10-year Treasury yields during December,
the dollar index is down 1.6 percent this month.
The euro was up 0.4 percent to $1.3293 on market
talk of interest among Asian central banks to buy the
currency. The euro probably needed to break above the high on
Dec. 15 of $1.3380 to confirm a small uptrend is underway in
the broad $1.3165 to $1.3500 range.
Citi, one of the biggest private participants in the
foreign exchange market, recommended betting tactically on the
dollar versus the euro based on risks surrounding an Irish
election early next year.
"European policymakers have proved as adept at snatching
victory out of the jaws of defeat, as they are at snatching
defeat out of the jaws of victory," Steven Englander, global
head of G10 FX strategy for Citi in New York, said in a note.
"The lack of liquidity as year end approaches and the
difficulties in coming up with comprehensive solutions on the
sovereign debt make us prefer euro short to long for the time
being."
(Additional reporting by IFR Markets)
