By Hideyuki Sano
TOKYO (Reuters) - The dollar and U.S. bond yields rose on Thursday after President Donald Trump proposed the biggest U.S. tax overhaul in three decades and as strong U.S. economic data added to the case for a rate hike by the Federal Reserve later this year.
The dollar's strength pressured many emerging market currencies, helping drag down MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> 0.4 percent to one-month lows.
In contrast, Japan's Nikkei <.N225> rose 0.3 percent, taking cues from gains on Wall Street, where the Dow Jones Industrial Average <.DJI> rose 0.25 percent while the S&P 500 <.SPX> gained 0.41 percent.
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Small-cap U.S. shares, seen as benefiting the most from the proposed tax cuts, soared, with Russel 2000 small-cap index <.RUT> notching a record high, rising 1.9 percent for its biggest one-day gain in almost six months.
"The fact that Trump made the tax proposal was seen as a step forward," said Hirokazu Kabeya, chief global strategist at Daiwa Securities.
Trump offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.
Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying.
The proposal faces an uphill battle in Congress, however, with Trump's own party divided, and the plan already prompting criticism that it favors the rich and companies and could add trillions of dollars to the deficit.
"It is hard to expect this proposal to pass the Congress smoothly. We have to pay attention to how the Republicans will view this," said Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities.
"It is possible that the net fiscal deficit spending will be smaller than what the stock markets expect," he added.
In the currency market, as the dollar broadly gained, the euro <EUR=> hit a six-week low of $1.1717 on Wednesday and last traded at $1.1734, having shed 1.8 percent so far this week.
The dollar also shot up to a 2-1/2-month high of 113.26 yen <JPY=> the previous day before stepping back to 112.88 yen.
The Canadian dollar extended its losses, suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year.
The Canadian unit <CAD=D4> fell to C$1.2497 to the U.S. dollar, its lowest in a month.
The dollar strengthened against many emerging market currencies while gold <XAU=> hit a one-month low of $1,281.5 per ounce.
"I don't see any changes to growth stories in emerging economies so I would assume selling in them will prove temporary, unless yields in developed worlds keep rising sharply," said a senior currency trader at a major Japanese bank.
U.S. bond yields jumped with two-year notes yield <US2YT=RR> rising to a nine-year high of 1.483 percent in anticipation of a rate hike in December.
Comments from Fed Chair Janet Yellen that the Fed needs to continue with gradual rate hikes have cemented expectations for a year-end policy tightening.
New orders for key U.S.-made capital goods increased more than expected in August, helping to boost optimism on the U.S. economy.
Yields on longer-dated bonds soared as Trump's tax proposal stoked worries about fiscal deterioration. U.S. municipal bonds were also sold for the same reason.
The 10-year yield rose to 2.326 percent <US10YT=RR>, its highest in almost two months, compared to this week's low of 2.214 percent while the 30-year bond yield <US30YT=RR> climbed to 2.878 percent after having risen 9 basis points on Wednesday - the biggest one-day rise in almost seven months.
Oil prices hovered a tad below their peaks hit earlier this week as the market consolidated after a strong rally this month.
Brent <LCOc1> futures traded at $57.71 a barrel, down from Tuesday's 26-month peak of $59.49.
U.S. West Texas Intermediate crude (WTI) <CLc1> fetched $52.11 per barrel, just below Tuesday's five-month high of $52.43 after oil stockpiles in the world's top consumer unexpectedly drew down, with refiners coming back online following Hurricane Harvey last month.
(Editing by Shri Navaratnam)