* Commodities extend rally in yield hunt, inflation hedge
* Dollar extends rebound after strong jobs data
* Nikkei hits three-month highs as yen eases
* Asia ex-Japan shares retreat from 2-1/2-year highs
By Koh Gui Qing;
SYDNEY, Nov 8 (Reuters) - Gold hit a fresh record and Japanese shares struck three-month highs on Monday as low interest rates in advanced economies drove investors to seek higher returns and protection against inflation.
The dollar rose sharply as traders continued to unwind short positions after stronger-than-expected U.S. jobs data on Friday, and as worries about debt problems in Ireland and other parts of the euro zone weighed on the euro.
Major European shares eased 0.1 percent in early trade as investors took profits on last week's strong rally, which had pushed some markets into "overbought" territory.
"A liquidity bubble is emerging in global markets," said Kenichi Hirano, operating officer at Tachibana Securities. "Investors increasingly believe Japanese stocks, which have lagged behind, will also reverse course."
Super-loose monetary policy and tepid economic growth in most of the developed world has fuelled the hunt for better yields. Friday's strong U.S. jobs report further encouraged the drive into riskier assets, although the effect was muted in the currency market by the bounce in the U.S. dollar.
The U.S. dollar index against a basket of major currencies rose 0.4 percent, extending its rebound from an 11-month low hit last week, restraining the yen from 15-year peaks and offering some respite to Japanese exporters.
Japan's Nikkei average rose 1.1 percent to its highest level since late July, and was the day's best performer in Asia.
The broader MSCI Asia ex-Japan index eased 0.1 percent but was still a whisker from Friday's 2-1/2-year highs.
Shanghai stocks struck seven-month peaks and the Indonesian bourse rose to yet another record high as foreign funds continued to flood into fast growing emerging markets, spurred by expectations that U.S. interest rates would stay near zero for a long time.
Since the start of 2009, Indonesian shares have leapt 172 percent, dwarfing a mere 10 percent gain in the Nikkei over the same period.
INFLATION FEARS PUSH GOLD TO NEW HIGH
Firm commodity prices led resource stocks higher across the region, though the dollar's rebound pared gains in energy and metals prices on Monday.
In Japan, Sumitomo Metal Mining Co climbed 2.3 percent and Mitsui Mining and Smelting gained 2.7 percent. Australia's Rio Tinto rose 0.2 percent.
Gold a traditional hedge against inflation, briefly powered to a record above $1,398 an ounce on concerns that fresh policy easing unveiled by the U.S. Federal Reserve last week would inevitably fuel inflationary pressures that may prove hard to snuff out.
Crude oil held near two-year highs and silver hit 30-year peaks.
A TURN IN EURO?
Even though the currency market seemed to shy from risk on Monday after a drop in the euro below $1.40 dragged other higher-yielding currencies down with it, some investors were not sure if selling in the euro would last.
In late trade, the euro was down at $1.3950, testing support at $1.3920, the 61.8 percent retracement of its Oct. 20 to Nov. 4 rally to a 10-month highs.
On one hand, resurging worries about debt problems in Europe were weighing on the common currency once more. The ten-year Irish bond yield spread over benchmark German debt hit record highs on Friday.
But many traders also conceded it was hard to be bullish on the dollar given record low U.S. rates and its sluggish economy.
"I think the euro could fall to around $1.37, though I think its trading range since October will hold," said Keiji Matsumoto, a strategist at Nikko Cordial Securities. (Additional reporting by Aiko Hayashi, Hideyuki Sano and Chikafumi Hodo in TOKYO) (Editing by Kim Coghill)