Asian stocks hit a two-month high on Monday, with investors betting the global economy will start to recover later this year by shedding some of their big holdings of safe-haven government bonds.
The Australian dollar pushed to a three-month high against the U.S. dollar as investors embraced higher-yielding currencies, taking heart from calmer financial markets and expectations for big government stimulus spending packages in coming weeks to revive growth.
Many market players are looking for a large U.S. spending package and tax cuts to help support the world's largest economy. U.S. President-elect Barack Obama will meet later on Monday with senior Congressional leaders to discuss the plan.
"Risk aversion has eased in the last week and this has sent both the Dow and the Nikkei higher," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo.
"There's quite a lot of expectations for the government of Obama and the policies he's likely to enact, but when he actually takes office this mood may evaporate and a lot of problems still linger."
Analysts believe the record drops that many stock markets suffered in 2008 have already gone a long way in anticipating the global economy's slide into recession and the hit to corporate earnings that will be reported in coming months.
The MSCI index of Asia-Pacific stocks outside Japan .MIAPJ0000PUS rose more than 1 percent to a two-month peak, taking gains on the first two trading days of 2009 to nearly 3 percent after a record 53 percent plunge last year.
Japan's Nikkei average .N225 gained 2.1 percent to reach a two-month high in a half-day of trading, the first as markets re-opened after a string of New Year's holidays.
A retreat in the yen helped lift exporters like Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz), while a jump in commodity prices boosted shares of energy-related companies and trading houses. Mitsubishi Corp (8058.T: Quote, Profile, Research, Stock Buzz) surged more than 9 percent.
Oil prices climbed 91 cents a barrel to $47.25 as OPEC product cuts took effect and an Iranian military commander reportedly called for an oil boycott over Israel's ground offensive in the Gaza Strip to counter militant rocket attacks.
Russia's move to cut natural gas supplies to the Ukraine also showed signs of affecting Central European countries.
The dollar edged up across the board, mainly getting a boost as the euro stumbled. Traders said the single currency's surge in December was due more to factors such as investors repatriating funds before year-end and was likely overdone.
The euro dropped 0.3 percent to $1.3860. The dollar index, a gauge of its performance against six major currencies, was up 0.4 percent at 81.799 .DXY and near a three-week high.
The Australian dollar climbed to its highest in almost three months at about $0.7160.
Both low-risk Japanese government bonds and U.S. Treasuries took a hit on the rebound in stocks.
The benchmark 10-year JGB yield rose 3 basis points to 1.195 percent, up from a five-year low hit last week. Ten-year Treasury notes dropped 13/32 in price to yield 2.407 percent, up nearly 40 basis points after touching their lowest levels since the 1950s in December.
"It's still too early to say whether bond yields are reversing their recent downward trend," said Chotaro Morita, chief fixed-income strategist for Japan at Barclays Capital.
"But market players are certainly watching out for possible fiscal stimulus steps from governments around the world, and JGBs are likely to be hit if hopes for government measures spark more stock buying.
(Additional reporting by Elaine Lies and Rika Otsuka in Tokyo; Editing by Dhara Ranasinghe)
