Asia stocks rally and oil extends slide

By Rafael Nam

HONG KONG (Reuters) - Asian shares rallied on Wednesday, ending a three-session losing streak, led by exporters on expectations the U.S. Federal Reserve will not lift interest rates anytime soon.

Exporters also benefited from gains in the dollar. The U.S. currency touched a 7-week high against the yen as sliding oil prices eased concerns that higher energy costs will adversely impact the world's largest economy.

Crude prices dropped further below $120 a barrel after Tropical Storm Edouard hit the Texas coast without causing any major disruption to U.S. energy operations.

But investors still held to some of their safe bond holdings, in a sign of lingering caution. Japanese government bond futures hit a 4-month high amid worries about the outlook for the world's second-largest economy.

"The scene was set for today with the fall in oil-inspired rally in the U.S. and the Federal Reserve retaining a neutral stance," said Stuart Smith, a private client adviser at Bell Potter Securities in Australia.

The Fed held rates steady at 2 percent on Tuesday, expressing concerns about both economic growth and inflation and indicating it is in no rush to push borrowing costs higher.

It is expected to hold rates steady for the rest of the year as concerns about the U.S. economy trump fears about rising inflation, according to a Reuters poll.

Several Asian central banks face a similar dilemma: how to manage slowing economic growth at a time of rising inflationary pressures, though the recent slide in commodity prices may change perceptions.