RPT-GLOBAL MARKETS-Bonds stumble, dollar rises after Bernanke
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* Government bonds drop on Bernanke inflation warning
* U.S. dollar hits three-month high against yen
* Asia stocks slip with eyes on inflation, financials
HONG KONG, June 10 (Reuters) - Government bond prices dived and the U.S. dollar rose to a three-month high against the yen on Tuesday, after a stark inflation warning from Federal Reserve chairman Ben Bernanke increased expectations that U.S. interest rates will rise.
The stronger dollar boosted shares in some Japanese exporters, but concern about the strength of inflation after oil hit a fresh record on Friday close to $140 a barrel weighed on stocks elsewhere, forcing most major indexes into the red.
The jump in oil prices has raised the risk that inflation could sail higher and the Fed will "strongly resist" public expectations for longer-term price pressures to get out of hand, Bernanke said in a speech. [ID:nN09303720]
His remarks pushed the benchmark 2-year U.S. Treasury yield, the most sensitive to monetary policy, to a five-month high.
The 2-year Japanese government bond yield hit its highest level since early August, as investors factored in a risk that other central banks might have to raise interest rates as well.
Bernanke's comments followed sobering remarks from European Central Bank President Jean-Claude Trichet. He jolted markets last week by suggesting euro zone rates could rise as early as July.
"Both Bernanke and Trichet comments, whether by design or not, are occurring one after the other, and have the effect of tightening global liquidity while keeping dollar weakness capped. What happens with oil prices in this environment will be critical," said Ashley Davis, currency strategist with UBS in Singapore.
The 2-year U.S. Treasury yield, which moves inversely to the price, was at 2.9285 percent after jumping to a high of 2.9656 percent US2YT=RR, up from 2.7148 percent late on Monday.
The 10-year yield US10YT=RR rose to 4.0559 percent from 4.0190 percent.
The 10-year Japanese government bond yield rose 10 basis points on the day to 1.815 percent JP10YTN=JBTC, its highest level since July 2007.
Besides Bernanke, other U.S. policymakers have stepped up their rhetoric to curb further weakness in the dollar. U.S. Treasury Secretary Henry Paulson said on Monday he would not rule out intervention in the currency market to keep the dollar from falling. [ID:nN09402403]
NOT A ROSY PICTURE
By 0200 GMT, the dollar had jumped to around 106.80 yen JPY=, its highest level since February, as dealers watched the spread between U.S. bond yields and Japanese yields widen.
The euro slipped 0.3 percent to $1.5593 EUR=.
The stronger dollar helped boost shares of Japanese exporters like Nikon Corp (7731.T) and Honda Motor Co (7267.T), although the Nikkei share average .N225 was largely unchanged mostly because of losses at property firms.
Asia-Pacific shares outside of Japan dropped 1.1 percent to a two-month low, an MSCI index showed .MIAPJ0000PUS.
The Shanghai composite index .SSEC sank 3.6 percent after China's central bank over the long holiday weekend tightened bank reserve requirements by one percentage point, the most all year.
Australia's S&P/ASX 200 index .AXJO tumbled 2.4 percent, marking one of the biggest decliners in the region, weighed by losses in the financial sector.
Bernanke's inflation comments came after U.S. crude prices surged to a record high of $139.12 a barrel on Friday, rising nearly 9 percent on the day off the back of weakness in the dollar and Middle East tensions.
Rising oil prices, the dollar and inflation have become the focus of both Bernanke and Trichet, who have both radically altered expectations for interest rates in the span of a week.
Indeed, the threat of inflation has weighed on shares, raising the prospect that emerging Asia-Pacific equity could be in a bear market.
From a record high on Nov. 1, the MSCI Asia ex-Japan index is now down 22 percent. The popular definition of a bear market is one characterised by a prolonged period of falling prices, usually by 20 percent or more.
"Inflation is still a big concern. These are not rosy times, that's for sure," said Lucinda Chan, division director at Macquarie Equities.
U.S. light crude prices were little changed on the day at $134.93 a barrel CLc1, but they are up 41 percent since the year began. (Additional reporting by Geraldine Chua in Sydney; editing by Neil Fullick)
