GLOBAL MARKETS-Asian stocks gain, dollar at two-year high as US rates, Trump in focus

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Asian stocks rise, aiming to shake off dour start to 2025

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European stocks set for muted open

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Dollar at 2-yr peak as US rates seen to stay higher for longer

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Trump's policies to remain on investors' minds

(Updates to Asia mid-afternoon)

By Ankur Banerjee

SINGAPORE, Jan 3 (Reuters) - Asian stocks rose on Friday, aiming to shrug off a lacklustre start to 2025, while the dollar was steady near a two-year high against a basket of currencies as investors fret about U.S. rates staying higher for longer.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.38% higher, with South Korean shares leading the charge.

Still, the index, which gained nearly 8% in 2024, was on course for a nearly 1% drop for the week. Japan markets are closed for the week.

China stocks struggled to bounce back on Friday after plunging on Thursday, highlighting growing worries about China's economy and a possible trade war when Donald Trump begins his U.S. presidency later this month.

China's blue-chip CSI 300 Index was 0.21% lower, on course for its biggest weekly drop in almost a year. Hong Kong's Hang Seng Index rose 0.58%.

Long-dated Chinese yields slid some more, with 10-year and 30-year government bond yields each weakening around 3 basis points to touch new record lows.

"It's been a tough period for equities around the turn of the year, but strange things can happen in illiquid markets," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management.

"I don't think we should extrapolate this performance. That said, a stronger dollar and higher bond yields will weigh on sentiment going forward and equity investors will be hoping this changes soon."

European stock markets were set for a subdued open, with Eurostoxx 50 futures 0.14% lower, German DAX futures and FTSE futures little changed.

On Wall Street, U.S. stocks closed broadly lower on Thursday after initial gains failed to hold. Shares of Tesla sank 6.1% after reporting its first annual drop in deliveries.

The dim mood comes in the wake of a sputtering end to 2024, denting a year-long rally fuelled by growth expectations surrounding artificial intelligence, anticipated rate cuts from the Federal Reserve, and more recently, the likelihood of deregulation policies from the incoming Trump administration.

But with the Fed last month jolting the markets by projecting fewer rate cuts than previously anticipated and rising worries that Trump's policies may prove to be inflationary, bond yields have risen, boosting the dollar and hurting stocks.

Vasu Menon, managing director of investment strategy at OCBC, said Trump's pro-growth and pro-business agenda may boost the U.S. economy but for the rest of the world, it may prove challenging due to possible tariffs and a stronger dollar.

"So, there is some degree of caution and anticipation in markets especially after the strong investment performance over the past two years."

DOLLAR'S DOMINANCE

Data overnight showed that the number of Americans filing new applications for unemployment benefits dropped to an eight-month low of 211,000 last week, pointing to low layoffs at the end of 2024 and consistent with a healthy labour market.

That bodes well for the U.S. economy, with payrolls and inflation data later this month likely to be the focus for investors as they gauge how measured the Fed's rate cut approach is likely to be.

Traders are pricing in 44 basis points of easing this year, below the 50 bps the U.S. central bank projected in December.

That has left the dollar index, which measures the U.S. currency against six other units, at 109.14, just below the two-year high of 109.54 it touched on Thursday. The index rose 7% in 2024 as traders adjusted their interest rate expectations.

The euro was among the biggest losers against the towering dollar, having tumbled 0.86% in the previous session to a more than two-year low of $1.022475. It was at $1.0271 on Friday, headed for a 1.6% weekly decline, its worst since November.

The yen strengthened a touch to 157.295 per dollar, but stood not too far from an over five-month low of 158.09 hit in December. The yen fell more than 10% last year, its fourth straight year of losses.

In commodities, oil prices inched higher due to optimism over China's economy and fuel demand after a pledge by President Xi Jinping to promote growth.

Brent crude futures rose 0.16% to $76.05 a barrel, while U.S. West Texas Intermediate crude rose 0.18% to $73.25 a barrel.

Gold was steady at $2,656 per ounce, after a 27% rise in 2024, its strongest annual performance since 2010.

(Editing by Michael Perry and Kim Coghill)