HONG KONG - Asian stocks edged higher, powered by a sharp rise in commodity-related shares as oil prices extended gains on Thursday, keeping a rising trend in raw materials prices intact and boosting the Australian dollar.

Major European stock markets were expected to open as much as 0.3 percent higher, according to financial bookmakers, ahead of U.S. retail sales data. Wall Street futures were up 0.3 percent, indicating a higher open later.

U.S. Treasuries edged higher, after the benchmark 10-year yield advanced to 4 percent overnight, the highest since Oct 16, on concern about how expensive it will be for the U.S. government to finance its growing budget deficit.

The U.S. dollar fell against the euro ahead of an $11 billion auction of 30-year bonds later, though some analysts expected foreign investors to continue to snap up Treasuries with higher yields, supporting the currency.

Meanwhile, tight inventories were squeezing crude prices, which rose to the highest since October last year.

Oil prices continue their march to, and then beyond, $75 per barrel. Our forecast of an average $85 a per barrel for 2010 appears well on track, and we believe further upside price risk exists incoming quarters, Barclays Capital analysts said in a research note.

U.S. light crude for July delivery was up 1.1 percent to $72.15 following U.S. data showing a larger than expected drawdown of inventories.

Commodity prices have been broadly supported by signs of sustained domestic demand in China. Despite a slightly larger than expected annual decline in Chinese exports in May, urban fixed asset investment rose 32.9 percent last month compared with a year ago.

Japan's Nikkei share average .N225 briefly poked above the psychologically key 10,000 to an eight-month high but closed down 0.1 percent on worries that rising interest rates in U.S. bond markets could thwart an economic recovery.

Still, shares of Nippon Steel Corp and other steel companies jumped and held on to gains after Morgan Stanley upgraded its ratings of the sector.

The benchmark S&P/ASX 200 index .AXJO in resource-rich Australia edged up 0.6 percent, buoyed by a 19 percent surge in shares of Fortescue Metals on market rumours of Chinese interest in resource companies.

The MSCI index of Asia Pacific stocks outside Japan .MIAPJ0000PUS rose 0.5 percent, but the materials sector index .MIAPJMT00PUS was up 2.1 percent.

The sub-index has risen 79 percent in the last three months, and the 90-day correlation with the Australian dollar has tightened to 0.98.

U.S. DOLLAR DOWN BUT NOT OUT?

The Australian dollar was up around 1.1 percent at $0.8102, boosted after a report showed national employment fell much less than expected in May. The data was interpreted by the market to mean the Reserve Bank of Australia has fewer reasons to lower interest rates further to support the economy.

The New Zealand dollar rallied more than 1.2 percent to $0.6365 after the central bank kept its interest rate steady at a record low 2.5 percent and pledged to keep it there through next year, a move seen ending its aggressive easing cycle to combat recession as the economy shows tentative signs of bottoming out.

The euro rose about 0.5 percent to $1.4040, but trends were unclear, with the market's focus torn between higher U.S. yields, pronouncements from reserve managers on their Treasury holdings and the trajectory of interest rates in the euro zone.

Some analysts were positive about the dollar's outlook, because of sustained interest by foreign official investors as well as private investors looking for higher yields.

The dollar gained following the steepening of the U.S. yield curve, which is certainly good news as it suggests the dollar can do well in an environment of rising yields, particularly should sovereign concerns abate, said Brian Kim, currency strategist with UBS, in a note to clients.

The benchmark 10-year U.S. Treasury yield slipped to 3.93 percent after rising as high as 4 percent on Wednesday. This week Treasuries have been under pressure because of $65 billion in new supply coming to the market.

Higher Treasury yields have a domino effect on the economy, since key rates for loans like mortgages are benchmarked to them. In the last three weeks, the 30-year U.S. mortgage rate has risen 88 basis points, according to the Mortgage Bankers Association, at a precarious time when the housing market is slowly stabilizing.

Japanese government bonds also sold off, pushing up the 10-year yield to the highest since late October, at 1.56 percent.

(Additional reporting by Maryelle Demongeot in SINGAPORE; Editing by Lincoln Feast)

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