EMERGING MARKETS-Asian currencies start October lower on rising US yields

By Shruti Agarwal

Oct 1 (Reuters) - Emerging Asian currencies made a tepid start to October on Thursday as investors remained cautious over rising long-term US Treasury yields, even as softer inflation data reduced expectations of another near-term Federal Reserve rate hike.

After a tough September, when most regional currencies and stocks posted losses, caution set in. Sovereign yields reached decade highs, major economies kept policy tight against sticky inflation, and oil stayed above $100 a barrel as the US-Iran war dragged on after an early-month escalation.

Higher US Treasury yields raise the discount rate for equities and erode emerging markets' yield advantage, while elevated oil prices threaten to widen external deficits and stoke inflation in the region's energy-importing economies.

MSCI's gauge of EM currencies .MIEM00000CUS inched 0.3% lower, with nearly all regional currencies trading lower, as the greenback held near a two-month high.

"The path to meaningful relief is narrow," said Inki Cho, financial markets strategist at online trading platform Exness.

Even as a slower-than-expected rise in US inflation in August has lessened the probability of a rate hike later this month, long-end bonds remain pressured, and investors now await Friday’s nonfarm payrolls report as the next catalyst for the Federal Reserve's path.

"The long-end yield dynamic has taken on a life of its own, driven by supply concerns and term premium repricing that isn't directly responsive to monthly data," Cho added, saying Asian currencies would likely remain in a defensive posture even if Friday's data shows a soft print, until long-end yields show a durable turn.

Indonesia's rupiah led losses, weakening to 17,930 against the dollar, while currencies of other net energy importers, including the Indian rupee and the Philippine peso retreated 0.2%.

The Thai baht depreciated as much as 0.4%, hitting its lowest level since July 24.

"Higher oil prices should worsen Thailand’s terms of trade and widen its oil deficit, while softer tourism receipts reduce an important FX buffer," MUFG analysts said in a note.

Elsewhere, the Singapore dollar slipped 0.2% and the ringgit 0.3%, while the relatively resilient South Korean won and Taiwan dollar also weakened around 0.2%.

Asian stocks traded mixed on the day, with chip-heavy benchmarks in South Korea .KS11 and Taiwan .TW11 posting gains of around 1.2% and 0.3%, respectively.

Blowout earnings from AI chipmaker Micron Technology MU.O helped ease concerns about the durability of AI-related spending, supporting the two markets.

Data showed South Korean exports jumped 83.5% in September from a year earlier, as semiconductor shipments more than tripled.

Among other regional stocks, Malaysian equities .KLSE extended declines, sliding 1%, while those in Jakarta .JKSE and the Philippines declined 0.6%.

HIGHLIGHTS:

** Indonesia plans the first adjustment of tax-free income threshold since 2016, minister says

** Asian factory activity expands thanks to global AI boom

** BOJ debated more rate hikes, scope for faster move at Sept meeting, summary shows

** Iran says it receives US response to latest proposal as Washington pulls out of Iraq