GLOBAL MARKETS-Shares lacklustre, while dollar loses out to euro

Reuters

* Asian shares adrift as Wall St ends with a whimper

* Dollar slips as Treasury yields drop amid positionunwinding

* News of US budget deal provides some relief

By Wayne Cole

SYDNEY, Dec 11 (Reuters) - Asian share markets look set foranother indecisive session on Wednesday as investors bookedprofits on a range of once-crowded positions, sending the dollarand Wall Street lower, while lifting the euro, bonds and gold.

News that U.S. budget negotiators had reached a two-yeardeal to avoid another government shutdown should be a relief tomarkets globally, but perhaps not enough to brighten theyear-end blues.

The Dow Jones industrial average lost 0.33 percent,while the S&P 500 Index dropped 0.32 percent. Thepan-European FTSEurofirst 300 index fell 0.74 percent.

Dealers said many of the moves were due to hedge fundsunwinding what had been popular trades in short yen, shortbonds, short gold, long dollars and long stocks.

Uncertainty about U.S. stimulus served as a convenientexcuse with the jury still out on whether the Federal Reservewill start scaling back its bond buying next week.

"Our global strategy team now believe the Fed will proceedwith a modest taper," said analysts at ANZ, though they put theprobability of such a shift at no more than 55 percent.

"If the Fed does not proceed in December, we don't think itwill be long after and we would expect (Chairman) Bernanke toprovide more detail on a tapering framework/timetable at hispost-meeting statement press debrief next week."

In any case it seems investors have made peace with the ideathe Fed will taper soon, if not next week then by March, andthat the economy will be able to withstand the move.

The central bank is also succeeding in convincing the marketthat tapering is not tightening and an actual hike in rates is avery distant prospect.

It was especially notable that yields on 10-year U.S.Treasury paper had dropped back to 2.80 percent having spiked as high as 2.93 percent in the immediate aftermathof Friday's payrolls data.

Eurodollar and Fed fund futures are notfully priced for a first rate rise until the end of 2015. Thedrop in U.S. yields also pulled the rug out from under thedollar, sending it lower across the board.

The impact was magnified against the euro as short-termrates in the zone had shifted higher when the European CentralBank sounded a lot less dovish than markets expected.

As a result the spread between U.S. and German two-yearyields has shrunk 10 basis points so far this month,making the common currency more attractive.

The euro was holding firm at $1.3760 on Wednesday, havingtouched a six-week peak of $1.3795. Dealers saidspeculative buyers now had a hungry eye on the October peak at$1.3833 wagering that a break would unleash a wave of stop-lossbuying that could lift the euro a lot higher.

The euro reached five-year peaks on the yen around 142.15 before easing off just a little to 141.45. The dollarlapsed to 102.84 yen having again failed to clearresistance around 103.40.

In commodity markets, gold rose about 2 percent on Tuesdayto a three-week high, boosted by technical buying andshort-covering. The spot price of bullion was up at$1,262.01 an ounce, off last week's trough at $1,211.44.

U.S. crude rose as traders mulled news of progress towardthe opening of a major pipeline that will transport oil fromstorage centres in the U.S. Midwest to refineries in the Gulf.

The news presaged further drawdowns in overall U.S. crudeoil inventories for a second straight week and lifted NYMEXcrude a further $11 cents to $98.62 a barrel.

At the same time, the prospect of increased supply of Brentcrude narrowed the spread between the two oil contracts to amonth-low. Brent crude for January delivery was 11 centsfirmer at $109.50 a barrel.

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