By Wayne Cole
SYDNEY (Reuters) - The U.S. dollar slid while bonds and shares rallied in Asia on Monday after Lawrence Summers dropped from the race to be head of the U.S. Federal Reserve.
Investors wagered that Fed policy would stay easier for longer under the other main candidate, Janet Yellen.
The surprise news comes just before the central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its monthly asset purchases from the current pace of $85 billion.
Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale it back quicker than the more dovish Yellen, who is currently second in command at the Fed.
"We suspect USD weakness will continue into Wednesday's FOMC (Federal Open Market Committee) decision as markets remove the premium in U.S. yields associated with Summers' nomination," said Sally Auld, a forex and interest rate strategist at JPMorgan.
"This move would be consistent with the market re-pricing to reflect a strong probability that Janet Yellen becomes the next Federal Reserve chair."
The reaction was immediate with the euro jumping over half a U.S. cent to $1.3367 in early trade, its highest in almost three weeks. The dollar likewise slid half a yen to 98.85 and dropped on sterling and the Swiss franc.
Liquidity was somewhat lacking with Japanese markets closed for a holiday on Monday.
Stock futures for the S&P50 mini index climbed 1 percent to 1,705.25, likely setting up a firm start for Asian bourses as well.
In debt markets, futures for the U.S. Treasury 10-year note leaped over a full point, a sizable move for Asian hours, as investors took yields lower.
The more distant Eurodollar contracts rallied sharply as the market pared back expectations for how quickly the Fed might finally start to tighten, as opposed to just tapering its stimulus. Contracts from late 2014 out to 2016 all enjoyed double-digit gains.
The prospect of a more protracted easing cycle helped gold recoup some of last week's losses, with the metal rising to $1,326.96 an ounce, from around $1,308.
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