* Rise in 10-year U.S. yields increase allure for Japan investors
* Two-year yields drop as traders cut bets for early Fed lift-off
* Dollar hurt as other central banks seen outpacing Fed tightening
* Safe-haven yen, dollar out of favour amid global equity rally
By Kevin Buckland
TOKYO, Oct 20 (Reuters) - U.S. bonds drove currencies on Wednesday, with a rise in long-term rates pushing the dollar to an almost four-year high on the yen, but a decline in shorter-dated yields putting it on the back foot against most other major peers.
The dollar and yen were also under pressure from a global equity rally that sapped demand for assets regarded as safe havens.
The dollar climbed as high as 114.585 yen for the first time since November 2017, with benchmark 10-year Treasury yields touching a fresh five-month high at 1.6630% in Asia. Higher long-term U.S. yields increase the allure of those assets to Japanese investors.
However, two-year Treasury yields hovered around 0.4050% after retreating sharply overnight from Monday's 19-month high of 0.4480%, signalling a scaling back of bets for early Federal Reserve interest rate hikes.
That contrasted to a rise in wagers this week for faster rate increases in the U.K. and New Zealand, which also pulled up expectations in neighbours like the euro zone and Australia.
"Risk sentiment remains in the ascendancy," while "a fall-back in front-end U.S. yields, so symptomatic of a slight paring back in expectations for when Fed rates 'lift-off' might occur," dealt the dollar a double-whammy, Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a research note.
At the same time, markets are coming to "the - highly belated - realisation that whether the Fed raises (its policy) rate in 2022 or not until later, other central banks are getting in ahead of them ... with the Bank of England likely next cab off the rank as early as next month," Attrill said.
The dollar index - which measures the greenback versus six rivals, including the yen - was little changed at 93.822 from Tuesday, when it lost about 0.2% and dipped to the lowest this month at 93.501.
The U.S. economic outlook got a little less rosy on Tuesday after data showed that U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labour, supporting expectations that economic growth slowed sharply in the third quarter.
Richmond Fed President Thomas Barkin said on Tuesday that U.S. labour shortages may outlast the coronavirus pandemic and limit overall economic growth unless the country comes up with better education, health and childcare policies to boost the number of people willing and able to work.
The euro was about flat at $1.16335 from Tuesday, when it jumped as high as $1.1670 for the first time since Sept. 29.
Sterling was little changed at $1.3793 after touching a one-month peak of $1.3834 in the previous session.
The risk-sensitive Australian dollar traded slightly weaker at $0.74725, but remained close to Tuesday's more than three-month top at $0.74855.
New Zealand's kiwi dollar was little changed at $0.71565, near the highest since June 11 at $0.7172, reached overnight.
In the equities space, Asia-Pacific stocks extended a global rally on Wednesday, with an index of regional shares adding 0.33%.
"The move in equities has seen the USD and JPY shunned," Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.
"It's really just pick a JPY cross and see the 'rip your face off' move," he said. "This is a momentum play here and timing the pullback in JPY crosses is key, but it doesn't feel like we're going to see a rush to cover JPY shorts anytime soon in this dynamic."
(Reporting by Kevin Buckland Editing by Shri Navaratnam)