EMERGING MARKETS-Asian currencies start October weaker as US yield pressure persists

By Shruti Agarwal

Oct 1 (Reuters) - Emerging Asian currencies made a subdued start to October as rising global bond yields continued to erode the region's rate advantage, while Indonesian assets held onto losses after inflation accelerated as expected.

Regional currencies extended last month's weak run, when most posted losses as bond yields reached decade highs, major economies tightened policy to curb 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.

Nearly all regional currencies retreated, with MSCI's gauge of EM currencies .MIEM00000CUS down 0.3%.

In Indonesia, the Jakarta Composite Index .JKSE extended losses slightly to 0.8% after data showed annual inflation quickened to 3.28% in September, as expected. That puts it near the top of Bank Indonesia's 1.5% to 3.5% target range, with fuel and food prices driving the increase.

The rupiah depreciated as much as 0.5%, leading losses in the region. The currency has weakened more than 7% this year, the worst performing in Southeast Asia, as price pressures from the Iran war have added to long-running concerns about policymaking and fiscal slippage.

That slump has prompted Bank Indonesia to raise rates by a combined 100 basis points over May and June.

Separate data showed Southeast Asia's largest economy posted a surprisingly large trade surplus of $3.55 billion in August, far above the roughly $630 million forecast in a Reuters poll.

Rate hikes are still in play as headline CPI creeps higher on account of food prices, Lavanya Venkateswaran, senior ASEAN and India economist at OCBC Bank, said.

Although a larger trade surplus means there is no near-term urgency for hikes, OCBC analysts still expect another a 25 basis point increase in either November or December, she added.

Currencies of other energy importers, including the Indian rupee and Philippine peso , fell between 0.1% and 0.3%, while the ringgit , South Korean won and Taiwan dollar weakened around 0.2%.

A slower-than-expected rise in US inflation has cooled bets of a hike later this month, but long-end bonds remain pressured, as investors awaited Friday’s nonfarm payrolls report as the next catalyst for the Federal Reserve's policy 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," said Inki Cho, financial markets strategist at online trading platform Exness.

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, he added.

Stocks in the region traded mixed, with chip-heavy benchmarks in South Korea .KS11 and Taiwan .TW11 rising around 2% and 0.9%, respectively. Blowout earnings and upbeat outlook from AI chipmaker Micron Technology MU.O helped ease concerns about the durability of AI-related spending, supporting the two markets.

Among other markets, Malaysian equities .KLSE extended declines, sliding 1%, while those in the Philippines .PSI declined 0.8%.

HIGHLIGHTS:

** South Korea's monthly exports top $120 billion for the first time on record chip sales

** Vietnam to move all Hanoi-listed stocks to Ho Chi Minh index in December under market overhaul

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