Global Markets - Dollar slips, stocks on defensive after Trump's protectionist address

By Hideyuki Sano

TOKYO (Reuters) - The dollar slipped and Asian shares were on the defensive on Monday as worries about President Donald Trump's protectionist policies outweighed optimism that he will follow through on promises of tax cuts and other stimulus.

Japan's Nikkei dropped 1.3 percent while shares in South Korea and Australia dropped 0.3 percent, though dollar-denominated MSCI's broadest index of Asia-Pacific shares outside Japan was flat.

U.S. stock futures dipped 0.2 percent, erasing gains made on Friday.

In his inaugural address, Trump pledged to end what he called an "American carnage" of rusted factories and vowed to put "America first".

"His speech sounded protectionist. It's something markets were already expecting but wasn't really a catalyst for risk-on trading," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Trump also said on Sunday he plans talks soon with the leaders of Canada and Mexico to begin renegotiating the North American Free Trade Agreement (NAFTA).

Prior to that, his administration said on his first day in the office that its trade strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact.

"The market is getting nervous about the possibility that the world's trade might shrink," said Koichi Yoshikawa, executive director of financial markets at Standard Chartered Bank in Tokyo.

"Many of his policies, including tax cuts and infrastructure spending, needs approval from the Senate and (may not be) that easy to realise. So it is hard to expect rosy news that would please markets," he added.

"The markets that had been led by expectations on his policy since the election are now the dragged down by the reality," he said.

The dollar had soared late last year on expectations that his pledges to cut taxes and hike infrastructure spending would boost the U.S. economy, but it has since lost steam.

In early Monday trade, the dollar fell 0.7 percent against the yen to 113.86 yen, edging towards its seven-week low of 112.57 yen touched on Wednesday.

The euro rose 0.1 percent to $1.0721, its highest level since Dec. 8.

The 10-year U.S. Treasuries yield fell to 2.445 percent, after having risen briefly on Friday to 2.513 percent, its highest since Jan. 3.

The two-year yield, which is more sensitive to the Fed's policy outlook, dropped sharply to 1.184 percent from Thursday's three-week high of 1.250 percent, giving back much of gains made after Wednesday's upbeat comments from Federal Reserve Chair Janet Yellen.

The Mexican peso, however, rose 0.3 percent on Monday to at 21.520 per dollar, after having risen 1.7 percent on Friday, its biggest gains in two months.

Oil prices held firm after ministers from OPEC and non-OPEC countries said they have made a strong start to lowering their oil output under the first such pact in more than a decade.

International benchmark Brent crude futures rose 0.1 percent to $55.74 per barrel, building on Friday's 2.5 percent gains.

(Editing by Kim Coghill)