Asia gains, dollar sags as weak US data dampens rate hike prospects

By Shinichi Saoshiro

TOKYO (Reuters) - Asian shares rose on Thursday and the dollar struggled near multi-week lows after weak U.S. economic data added to expectations that the Federal Reserve will delay hiking interest rates.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent. The index fell the previous day after soft consumer inflation in China added to concerns about the world's second-biggest economy.

Australian shares nudged up 0.2 percent, while Japan's Nikkei <.N225> lost 0.7 percent as the yen rallied in response to the soft dollar.

Japanese manufacturers' confidence worsened for the second straight month in October and is expected to fade going forward, a Reuters poll showed, adding to lingering fears of a recession and keeping policymakers under pressure to deploy fresh stimulus.

On Wall Street, the Dow lost 0.9 percent and the S&P 500 shed 0.5 percent overnight on Wal-Mart's weak profit forecast and disappointing bank earnings. [.N]

U.S. retail sales and producer prices data out on Wednesday were weaker than expected, supporting growing views that the Federal Reserve would delay hiking interest rates until 2016.

"With inflation falling and consumer spending stagnating, it will be very difficult for the Federal Reserve to pull the trigger this year. The economy could regain momentum in November or December but a significant turnaround would be needed to shift market expectations," wrote Kathy Lien, managing director of FX Strategy for BK Asset Management.

The prospect of a delayed rate hike boosted U.S. Treasuries, which saw the benchmark 10-year note yield fall from 2.05 percent on Wednesday to as low as 1.97 percent.

Lower debt yields in turn hit the dollar, which struggled near a 5-week low of 118.56 yen . The euro stood near a 7-week high of $1.1489 . The Australian and New Zealand dollars rallied versus the greenback as well.

As a result the dollar index hovered close to 93.845, its lowest since late August.

The pound traded near a 3-week high of $1.5495 struck overnight, when it soared 1.5 percent on upbeat British employment data.

Crude oil slipped amid lingering concerns of a global supply glut.

Expectations of more Iranian supply following a nuclear deal and concerns that economic worries in China and Europe will weigh on demand have pressured oil this month. [O/R]

U.S. crude was down 0.7 percent at $46.30 a barrel, although a weaker dollar helped slow its decline.

(Editing by Kim Coghill)