* Dollar at 16-mth low on yen, gold highest since May
* European shares fall sharply, bonds surge in safety rush
* Hong Kong shares lead Asia equity markets lower
* Fed's Yellen upbeat on economy, acknowledged global risks
* US yield curve flattest since late 2007
By Marc Jones
LONDON, Feb 11 (Reuters) - Turbulence tore through global
markets on Thursday as investors sought the safety of Japanese
yen, gold and top-rated bonds while dumping U.S. dollars on bets
the Federal Reserve could be done with raising interest rates.
Even the absence of Tokyo for a holiday could not stop the
dollar from hitting a 15-month low on the yen, and gold finally
broke major chart resistance to reach its highest since May as a
wave of risk aversion swept through trading floors.
Europe got off to a torrid start, with Britain's FTSE 100
.FTSE down 2.3 percent, Germany's DAX .GDAXI 2.4 percent
lower, France's CAC 40 .FCHI down 2.8 percent and U.S. futures
also pointing to 1 percent drop for Wall Street ESc1 later.
Sweden's crown SEK= and government bond yields SE2YT=TWEB
were sent tumbling as its central bank delivered a surprise cut
to its already deeply negative interest rates. [nL8N15Q243 ]
Insatiable demand for U.S. Treasuries drove longer-term
yields to almost three-year lows and flattened the yield curve
in a way that has presaged economic recession in the past.
Benchmark European German Bund yields DE10YT=TWEB dropped
like a stone and UK yields UK10YT=TWEB hit an all-time low
too, as riskier Spanish ES10YT=TWEB , Italian IT10YT=TWEB and
Portuguese PT10YT=TWEB bonds moved in the opposite direction.
The euro zone's finance ministers are set to meet later with
worries creeping back in about Portugal and Greece's ability
to stick to the terms of their bailouts again.
"What this shows is that the risk-off mode has come back
very quickly and that the worst may still be to come in these
markets," said Rabobank European strategist Emile Cardon.
"What is different to previous times is that the bad news in
now coming from everywhere, China, Portugal the U.S. the
commodity sector the banking sector. It's like several smaller
crises could combine into one big crisis."
The flight from risk told on most Asian shares, with Hong
Kong .HSI - a favourite channel for global investors to play
China - diving 4.2 percent as investors there returned from the
long Lunar New year holidays. Mainland China markets are closed
all week.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS shed 1.4 percent, and South Korea .KS11
resumed with a 2.9 percent drop.
Wall Street had ended Wednesday mixed after Fed Chair Janet
Yellen sounded optimistic on the U.S. economy, but acknowledged
risks from market turmoil and a slowdown in China.
Analysts took that to mean a hike in March was unlikely, but
further tightening remained possible later in the year.
"Yellen made it clear that while the Fed still expects to
continue on its gradual tightening path, policy was not on a
pre-set course and would respond appropriately to developments,"
said Justin Fabo, a senior economist at ANZ.
"The real test may come later, if markets continue to
deteriorate and look to central banks to save them. Are
policymakers' guns loaded with blanks?"
YIELDS STEAM ROLLERED
It seemed some were already preparing for the worst.
Longer-term U.S. debt rallied hard as investors wagered that
either the Fed would be unable to tighten at even a gradual
pace, or that if it did hike it would only hasten the arrival of
recession and deflation.
In a marked turnaround, yields on 10-year Treasuries fell to
1.6330 percent US10YT=TWEB , from a top of 1.773, almost
exactly matching the lowest close from May 2013. Futures TYc1
imply further price gains lie ahead.
As a result, the spread over two-year paper US2YT=TWEB
shrank to just 96 basis points, the smallest gap since late 2007
just before the global financial crisis hit.
Likewise, Fed fund futures 0#FF: are pricing in the
shallowest of shallow tightening paths. The market implies a
rate of 45 basis points for the end of this year, 60 basis
points at the end of 2017 and 90 by the close of 2018.
The inexorable decline in U.S. yields continued to drag on
the dollar, which reached lows last seen in October against a
basket of currencies .DXY .
The yen was again lifted by safe-haven flows, as befits
Japan's position as the world's largest creditor nation. The
dollar sliced down through 111.36 yen to reach depths not delved
since October 2014 at 110.99 JPY=EBS .
The euro also weakened against its Japanese peer, sliding to
a 2-1/2 year low of 126.06 yen EURJPY=R . Against the greenback
though, the euro drove to three-month high of $1.1355.
The aversion to risk helped lift gold XAU= as far as
$1,217.00 an ounce, clearing stiff resistance around $1,200.
Oil prices resumed their decline as U.S. crude CLc1 slid
70 cents to $26.77 a barrel, while Brent futures LCOc1 lost 33
cents to $30.50.