Dollar sits pretty, bond yields rise as Fed bets firm

By Marc Jones

LONDON (Reuters) - The dollar took a breather on Monday having surged to a seven-month high, while emerging, commodity and bond markets had a nervy feel after strong U.S. jobs data boosted bets on a December Federal Reserve rate hike.

European (FTEU3) and Asian (MIAPJ0000PUS) shares both started the week in a subdued mood as a fresh batch of soft Chinese trade data added to the uncertainty from what is increasingly expected to be the Fed's first hike in almost a decade.

Tokyo's Nikkei (N225) had leapt 2 percent as the yen fell sharply against the dollar, and hopes for more stimulus following Beijing's weak data saw Chinese stocks <.SSEC> jump 1.5 percent, but they were exceptions.

A solid bounce back in German exports was not enough to lift Europe's main bourses <0#.INDEXE> as traders continued to cash in some of last week's 2-1/2 month highs for the FTSEurofirst.

French carmaker Renault also slid 3.2 percent (PA:RENA) after the country's prime minister, Manuel Valls, said on Sunday the government didn't want a merger between the firm and Japanese partner Nissan. <7201.T.>

"Market participants are of the view (after strong U.S. jobs data on Friday) that the worries about the global economy are overdone but then this weekend we saw some disappointment in the China exports," said Emile Cardon, a strategist at Rabobank in the Netherlands.

"Emerging markets are in the doldrums again and that is having a negative impact on sentiment."

The dollar (DXY) also saw some modest profit taking against the euro and sterling in early European deals after its post-payrolls surge, although it continued to squeeze higher against the yen. [FRX/]

It had advanced to a 2-1/2-month peak of 123.49 yen . The euro was higher at $1.0772 having struck a 6-month trough of $1.0704 on Friday.

Some analysts said the ECB's aggressive talk about cutting rates and more money printing at its last meeting had been because of the euro's strength - and the fact that it had now fallen back made any major cuts less likely.

"The lower euro/dollar goes, the less need there is for the ECB to do more," said BNP Paribas (PA:BNPP) currency strategist Michael Sneyd in London.

EMERGING PRESSURE

Emerging Asian currencies and stocks (MSCIEF), which took the brunt of some heavy global selling over August and September were back in the firing line as the prospect of a Fed hike next month loomed ever larger.

India's rupee slumped to its weakest in more than six weeks after Prime Minister Narendra Modi's heavy defeat in Bihar's state elections raised concerns the government would struggle to pass policy reforms markets have been hoping for.

The Philippine peso also hit a six-year low. The South Korean won , the Malaysian ringgit and the Thai baht touched one-month troughs. Indonesia's rupiah fell to its weakest in more than two weeks.

After the U.S. jobs data which saw the largest gain in jobs since last December and the unemployment rate fall to 5.0 percent, it lowest since April 2008, interest rates futures were now pricing in a 70 percent probability that the U.S. central bank will raise borrowing costs next month.

Treasury yields continued to creep higher in Europe having soared on Friday. The key 2-year yield (US2YT=RR), the most sensitive to a near-term rate hike, was at a 5-1/2-year high. [US/]

Europe's benchmark German Bund yields were being dragged higher too, while Portuguese government bond yields hit a 10-week high after leftist parties agreed to form an alternative government to try to oust the center-right in a vote this week.

There was also uncertainty in neighboring Spain, where Catalan separatists are expected to approve on Monday in the regional parliament a motion saying the process to split the northeastern region from Spain has started.

Among commodities, the strength of the dollar remained the theme. London copper slipped further below the $5,000 mark towards a six-year low, after the China trade data underlined struggling growth in the world's top metals user.

Spot gold struggled near a 3-month low of $1,084.90 an ounce though oil prices rebounded on bargain hunting as OPEC said it expected global demand to remain strong next year.

Brent crude (LCOc1) had bounced 0.8 percent to $47.81 a barrel by 0945 GMT while U.S crude (CLc1) was up 0.5 percent at $44.55 a barrel.