* Euro undermined as ECB talk drags down bond yields
* US yields fall as auctions draw strong demand, inflation
* Asian shares get little inspiration from a flat Wall St
* Emerging markets extend their recent rally, hit two-month
By Wayne Cole
SYDNEY, March 28 (Reuters) - The euro was wallowing near
three-week lows in Asia on Friday as speculation intensified
that the European Central Bank might ease policy further, while
bond yields and gold were down on the outlook for low inflation
in the U.S. and Europe.
Activity in Asian shares was lacking after a flat finish on
Wall Street and as the end of the quarter approached. Both the
Australian market and MSCI's index of Asia-Pacific
shares outside Japan were barely changed.
There was more life in currencies as talk of ECB action
pulled down bond yields across the EU and undermined the euro.
Peripheral European bond yields hit a multi-year trough on
Thursday while the premium that U.S. two-year debt pays over
German paper widened to its fattest since late 2012.
That saw the euro peel off to $1.3742 and a long way
from the March peak of $1.3967. Its largest loss of 1.2 percent
came against the New Zealand dollar which has been on
a tear since the country's central bank raised interest rates a
couple of weeks ago.
The Reserve Bank of New Zealand has all but promised to hike
rates several more times this year, setting it far apart from
other developed nations and sending its currency to a
two-and-a-half year peak on the U.S. dollar.
Asian stocks got little inspiration from Wall Street, where
the Dow and the S&P 500 both ended a fraction
lower. The Nasdaq extended its recent pullback with a
loss of 0.54 percent.
Investors seemed to derive scant comfort from the final
revision to fourth-quarter growth to 2.6 percent and a decline
in weekly jobless claims to a four-month low.
Yet the sluggishness of U.S. stocks contrasts with a sudden
revival in emerging markets, leading some to suspect that
stretched valuations on Wall Street are leading fund managers to
go bargain hunting elsewhere.
The MSCI index of emerging shares has climbed for
five straight sessions to the highest in two months. The index
for Latin America boasted its biggest daily gain
on Thursday since July 2012 as Brazilian markets rallied.
TREASURIES IN DEMAND
In debt markets, a sale of U.S. seven-year Treasury paper
drew red hot demand, just as a five-year auction had on
Wednesday. Direct bidders, which include central banks, took a
record share of the sale, leaving dealers scrambling to cover
The demand for U.S. debt also showed up in the amount of
Treasuries that the Federal Reserve holds on behalf of foreign
central banks, which surged by a record $56 billion in the week
to Thursday, on top of a $32 billion jump the previous week.
The inflow almost entirely reversed a mysterious $104
billion drop three weeks ago that many had thought was due to
Russia pulling its money out of the U.S. to avoid possible
sanctions over Ukraine.
Whatever the source of the demand it has helped drag down
longer-term U.S. yields and contributed to a marked flattening
of the yield curve. The spread between five-year notes and
thirty-year bonds has shrunk to its smallest in five years.
The shift also reflects speculation that U.S. interest rates
will rise sooner than first thought and thus keep inflation well
contained below 2 percent.
The downward revision in the market's inflation expectations
might also be one reason gold has taken a turn for the worse in
recent sessions. On Friday, the metal was stuck at $1,291.56 an
ounce having lost 7 percent in nine sessions.
In the oil market, Brent rose to $107.83 a barrel,
while U.S. crude futures were steady at $101.24.
(Editing by Shri Navaratnam)