Shares and bonds rally, dollar off as Yellen strikes cautious stance

By Wayne Cole

SYDNEY (Reuters) - Asian shares gained on Wednesday as markets scaled back expectations for how fast and far U.S. interest rates might rise this year, bruising the dollar and boosting sovereign bonds.

MSCI's broadest index of Asia-Pacific shares outside Japan firmed 0.7 percent, while the Australian market <.AXJO> bounced 0.6 percent.

Japan's Nikkei <.N225> was the only loser as a rise in the yen against the dollar nudged the index down 0.5 percent.

The sea change came after Federal Reserve Chair Janet Yellen emphasised global dangers to growth and inflation, and thus the need to proceed "cautiously" on tightening policy.

"Her comments stand somewhat in contrast to recent remarks by other FOMC members and are more clear in respect to downside risk factors," said Michael Gapen, chief U.S. economist at Barclays.

"Hence, we see the comments as an effort to exert control over the message and, in doing so, tilt expectations for policy rate hikes in a decidedly dovish direction."

Debt markets rallied hard in response with yields on 10-year U.S. paper dropping 7 basis points to one-month low of 1.80 percent.

Fed fund futures <0#FF:> jumped as investors priced out any a chance of a hike in April and only a slim probability of a move in June. The December contract implies a rate of just 57 basis points compared to the current 37 basis points.

On Wall Street, technology shares led gains in major indexes and both the S&P 500 and Dow closed at their highs for 2016. The Dow rose 0.56 percent, while the S&P 500 gained 0.88 percent and the Nasdaq 1.67 percent.

Dollar bulls were not so pleased and the U.S. currency fell across the board. The dollar index was down at 95.108 early in Asia having suffered its biggest one-day fall in nearly two weeks.

The greenback dipped to 112.51 yen and away from a two-week high of 113.80. It also lost ground on the euro to $1.1297 , nearing the March peak of $1.1342.

Commodity currencies gained ground, with the Australian dollar back above 76 U.S. cents and not far off a recent 8-1/2 month peak of $0.7681.

The drop in the U.S. dollar helped oil prices regain a little ground, as did a forecast that U.S. stockpiles may have grown by less than first thought.

U.S. crude added 39 cents to $38.67 a barrel, after falling around 3 percent on Tuesday. Brent rose 31 cents to $39.45.

Gold was up at $1,240 an ounce, after rising almost 2 percent overnight.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)