Japan shares rise to 8-month high

HONG KONG (Reuters) -- The 10-year U.S. Treasury yield hit a seven-month high on Monday ahead of fresh supply this week and because of speculation the Federal Reserve may have to raise interest rates sooner than anticipated, which supported the dollar.

Japanese stocks rose to fresh eight-month highs, helped by a report on Friday that showed fewer-than-expected U.S. job losses in May, but major European stocks were expected to fall as much as 0.6%, according to financial bookrunners, hurt by lower oil prices.

The U.S. dollar edged up, after higher U.S. bond yields and doubts about the speed at which central banks will diversify their dollar reserves have improved its outlook. The ICE Futures U.S. dollar index jumped 1.6% on Friday after the U.S. jobs report, the biggest daily gain this year.

Investors will likely focus this week on a deluge of Chinese economic data for clues on whether consumer demand for Asian goods is strengthening in major Western markets, and if Chinese domestic demand is holding up despite weak exports.

Reports from China due this week include trade, industrial production, fixed investment and retail sales.

Japan's Nikkei share average closed 1% higher, with major exporters such as Canon Inc (CAJ) and Honda Motor Co (HMC) among the biggest supports to the index.

"Money is flowing into assets such as commodities and stocks as risk tolerance has steadily improved on the back of hopes for a recovery. But we are still not in a position to be overly optimistic over the medium to long term," said Takahiko Murai, general manager of equities at Nozomi Securities in Tokyo.

Highlighting investor caution, the MSCI index of Asia Pacific stocks outside Japan fell 0.65%. Declines were spread fairly evenly across the sectors, suggesting investors were trimming positions on concerns about how expensive the region had become after a three-month stock rally.

Hong Kong's Hang Seng index slid 0.7% in choppy trade, weighed down by a 2.2% drop in shares of global lender HSBC (HBC).

Australian markets were closed for a public holiday.

U.S. markets ended mixed on Friday and S&P 500 futures were down 0.3%, pointing to a lower open on Monday.

The ICE Futures U.S. dollar index, a gauge of its value against a basket of six other currencies, rose 0.1% to 80.80 The index was bumping up against a technical obstacle just ahead of 81.00.

The dollar's reaction to the payrolls data was significant because in the last several months, positive U.S. economic surprises have usually pushed the dollar down, as investors moved out of safe assets to higher yielding ones.

Yet, with the spread of 2-year euro zone government bond yields over the same maturity of U.S. Treasurys collapsing around 22 basis points since last Thursday, investors may begin to look for higher returns in U.S. assets.

"We suspect the dollar will continue to remain supported over the coming days, especially if interest rate differentials are once again regaining their influence," said Mitul Kotecha, global head of foreign exchange strategy with Calyon in Hong Kong, in a note.

Late maturity U.S. Treasuries were under fire ahead of auctions this week for 10-year and 30-year debt securities worth $65 billion. The volatility in bond markets has meant that for the U.S. government the cost of financing its growing budget shortfall has gone up 20 to 40 basis points in the last week.

U.S. Treasury yields edged up further after jumping on Friday. The benchmark 10-year yield rose to 3.87% having risen about 74 basis points in the last month.

Higher long-term rates could undermine a U.S. economic recovery by sapping the flow of cheap credit to the private sector and pushing up mortgage rates.

The 2-year yield the most sensitive to views on the Federal Reserve's benchmark interest rate, inched up to 1.33% to the highest since November 2008.

The May U.S. payrolls number led dealers to aggressively price in rate increases by the end of 2009, quicker than many investors had expected.

After the selloff in Treasurys on Friday, Japanese government bond futures fell 0.4 point having declined 1.2% in the last two months.

U.S. light crude for July delivery fell 1.4% to $67.47 a barrel as the stronger U.S. dollar and profit taking prompted a retreat from a seven-month high above $70 on Friday.

Gold in the spot market was largely changed at $955.30 an ounce after the dollar's strength on Friday cut the metal down by 2%.