By John Geddie
LONDON (Reuters) - European shares dipped and German bond yields briefly touched record lows on Wednesday, a contrast with the buoyant mood on Wall Street as investors focused on diverging growth and interest rate prospects in Europe and the United States.
U.S. stocks were set to hold on to gains after the Dow closed above 19,000 for the first time on Tuesday , with investors anticipating a growth boost under President-elect Donald Trump and a rate hike from the Federal Reserve - expectations that should be reinforced by minutes released later on Wednesday.
With European policymakers leaning the other way, reaffirming their commitment to an easy approach, and banking worries rattling the bloc's stock markets, the single currency held near one-year lows.
The dollar, meanwhile, is perched near a 14-year high.
The transatlantic split has been most stark in bond markets, with the falling yields on two-year German paper keeping the gap to U.S. equivalents near an 11-year high.
In Britain, sterling was a tad weaker at $1.2396 before a budget update from finance minister Philip Hammond. Hopes for fiscal stimulus have been lowered as the government has stressed its borrowing limits.
"We do like policy divergence trades," Rabobank strategist Lyn Graham-Taylor said.
"I think markets had been a bit euphoric in the wake of Trump and now they are coming around to the understanding that there is not going to be fiscal stimulus that is going to be good for everyone."
Weighed down by Italian banking stocks, euro zone shares shed 0.3 percent, failing to match the exuberance in Asia, where stocks gained 0.7 percent to strike a one-week high, and Tuesday's rally in the U.S.
With Japan on holiday, Australia's main index led the action in Asia with a rise of 1.35 percent to a one-month top, helped by strength in bulk commodity prices.
China's blue-chip CSI300 index advanced 0.5 percent to a near 11-month peak as the yuan touched its lowest in six years.
YIELD GAP UNDERMINES EURO
With equities in demand, U.S. bonds were getting the cold shoulder. Two-year note yields rose as far as 1.107 percent on Tuesday, the highest since April 2010.
Euro zone yields have been heading in the opposite direction and some solid growth data did little to shake expectations for more monetary easing from the European Central Bank next month.
That saw yields on German two-year paper hit a record low of minus 0.74 percent early on Wednesday. That move kicked into reverse after a report that the ECB is looking to lend out more bonds to avert a market freeze, although the gap to U.S. Treasuries remains near its widest since 2005. That gap kept the euro pinned at $1.0624, not far from last week's one-year trough at $1.0569. Against a basket of currencies, the dollar was flat at 101.03, very close to a 14-year peak.
The dollar also kept most of its recent hefty gains on the yen at 111.04, though it has met resistance around 111.35 in the last couple of sessions.
Emerging markets have struggled in recent days as surging U.S. bond yields sucked much-needed capital out of Asia. Trump's past talk of trade tariffs has also weighed on sentiment in the export-intensive region.
Analysts at JPMorgan said Trump's pledge to dump the Trans-Pacific Partnership was already priced into markets.
"What may not be factored in is the possibility of follow-through on other, more protectionist campaign proposals," they wrote in a note to clients.
"We remain concerned about this as a source of downside risk, delivering a negative surprise to markets which so far appear to be enamored of his emphasis on fiscal stimulus and deregulation since the election."
Elsewhere, oil prices edged higher but gains were capped by investors' doubts that oil cartel OPEC would agree to a large enough production cut to significantly reduce a global surplus when it meets next week.
Brent crude rose 25 cents to $49.37 a barrel, while U.S. crude rose 20 cents to $48.22.
Industrial metals advanced on talk of demand from China and the whole global reflation trade. Copper was near a 16-month high, while iron ore futures surged 8 percent on the back of higher steel prices.
(Additional reporting by Wayne Cole in Sydney; Editing by Mark Trevelyan)