* Asian shares drift lower as Wall St ends with a whimper
* Dollar on defensive, Treasury yields drop amid position unwinding
* News of US budget deal provides fleeting relief
By Wayne Cole
SYDNEY, Dec 11 Most Asian share markets lurched lower on Wednesday as investors booked profits on a range of once-crowded positions, largely to the benefit of bonds and the detriment of the U.S. dollar.
News that U.S. budget negotiators had reached a provisional two-year deal to avoid another government shutdown offered some relief, but not enough to overcome the year-end blues.
"U.S. fiscal issues are likely to be less of an issue for investors next year," said Shane Oliver, head of investment strategy and chief economist at AMP Capital. "The short-term fiscal easing will also further boost U.S. economic growth, albeit the impact is only marginal."
Celebrations were certainly muted in Asia, with Japan's Nikkei off 0.9 percent and South Korean shares down 0.6 percent even as the country reported its lowest jobless rate on record.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.7 percent, while Shanghai's market lost 1.1 percent.
Dealers said many of the moves were due to hedge funds unwinding what had been popular trades in short yen, short bonds, short gold, long dollars and long stocks.
Uncertainty about U.S. stimulus served as a convenient excuse with the jury still out on whether the Federal Reserve will start scaling back its bond buying next week.
AMP's Oliver noted that the U.S. budget deal, if passed, might actually hasten a tapering by removing a potential threat to economic growth.
"It's still 50/50 though as to whether it will start next week or early next year," he added.
In any case it seems investors have made peace with the idea the Fed will taper soon, if not next week then by March, and that the economy will be able to withstand the move.
The central bank is also succeeding in convincing the market that tapering is not tightening and that an actual hike in rates is a very distant prospect.
NO TAPER TANTRUM
It was especially notable that yields on 10-year U.S. Treasury paper had dropped back to 2.80 percent, having spiked as high as 2.93 percent in the immediate aftermath of Friday's payrolls data.
Eurodollar and Fed fund futures are not fully priced for a first rate rise until the end of 2015. The drop in U.S. yields also pulled the rug out from under the dollar, sending it lower across the board.
The impact was magnified against the euro as short-term rates in the zone had shifted higher when the European Central Bank sounded a lot less dovish than markets expected.
As a result the spread between U.S. and German two-year yields has shrunk 10 basis points so far this month, making the common currency more attractive.
The euro was holding firm at $1.3760 on Wednesday, just off a six-week peak of $1.3795. Dealers said speculative buyers now had a hungry eye on the October peak at $1.3833, wagering that a break would unleash a wave of stop-loss buying that could lift the euro a lot higher.
The dollar has also lost ground to sterling and touched a two-year trough on the Swiss franc.
The euro had reached five-year peaks on the yen around 142.15 before easing off to 141.27. The dollar lapsed to 102.66 yen having again failed to clear resistance around 103.40.
In commodity markets, gold came off a three-week high to stand at $1,256.54 an ounce, though that was still up from last week's trough of $1,211.44.
U.S. crude rose as traders mulled news of progress towards the opening of a major pipeline that will transport oil from storage centres in the U.S. Midwest to refineries in the Gulf.
The news presaged a further drawdown in overall U.S. crude oil inventories for a second straight week and kept NYMEX crude firm at $98.47 a barrel.
At the same time, the prospect of increased supply of Brent crude narrowed the spread between the two oil contracts to a month low. Brent crude for January delivery was 2 cents lower at $109.36 a barrel.