GLOBAL MARKETS-Asia rides Wall St rally, dollar sags on inflation relief

(Updates prices, adds additional analyst comment)

By Kevin Buckland

TOKYO, May 16 (Reuters) - Asian stock markets rallied on Thursday, buoyed by Wall Street's surge to all-time peaks overnight after a milder U.S. inflation report raised expectations the Federal Reserve will deliver two interest rate cuts this year.

The dollar remained on the back foot, sagging to fresh multi-week lows against peers including the euro and sterling.

U.S. Treasury yields extended their retreat in Tokyo trading, sinking to six-week troughs. That helped the beaten-down yen to continue its recovery, even as data showed the Japanese economy contracted more than expected in the first quarter.

Gold marched back toward record levels and crude oil added to gains after rebounding strongly overnight from a two-month trough.

U.S. data on Wednesday showed the consumer price index (CPI) rose by 0.3% in April, below an expected 0.4% gain, raising hopes the Fed can cut rates by 50 basis points this year, with the first quarter-point reduction fully priced for September.

The data provided succour to markets after higher-than-expected U.S. consumer prices in the first quarter had led to a sharp paring of rate cut bets and even stoked some worries of an additional hike.

"The expression of relief ripples through risky assets, with markets coming alive the moment we saw U.S. core CPI," Chris Weston, head of research at Pepperstone, wrote in a report.

"All in all, after three months of troubling price pressures, this is a report that will sit well with (Fed Chair) Jay Powell and co."

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.5%. Hong Kong's Hang Seng and Australia's stock benchmark each rallied about 1.6%.

Japan's Nikkei advanced more than 1%.

"U.S. CPI inflation provided relief that the Fed's last mile towards its 2% inflation target may become less complicated," DBS Group strategists wrote in a client note.

"Market participants are sufficiently satisfied to keep the soft-landing narrative going, buoying risk sentiment in the process."

Japan's currency was a standout on Thursday, far outpacing gains against the dollar among major peers.

The dollar was last down 0.66% at 153.86 yen, from as high as 156.55 in the previous session.

The 10-year U.S. Treasury yield, which the dollar-yen pair tends to track, slipped as low as 4.705% for the first time since April 5 in Tokyo trading.

The dollar index, which measures the currency against the yen, euro, sterling and three other rivals, touched a five-week low of 104.07.

The euro rose to $1.0895, the highest since March 21, and sterling reached $1.27005 for the first time since April 10.

Also benefitting from broad dollar weakness, leading cryptocurrency bitcoin marked a fresh three-week top at $66,694.89 following Wednesday's more than 7% advance.

"It's hard to go past the move in crypto," said Pepperstone's Weston.

"The 23 April swing high of $67,252 is the near-term target and the level to watch," he added. "A break here and we will likely see traders chasing this move for a push into $70,000."

Gold rose as high as $2,397.32, pushing toward the all-time peak of $2,431.29 from April 12.

Brent futures rose 39 cents, or 0.47%, to $83.14 a barrel, while U.S. West Texas Intermediate crude (WTI) gained 42 cents, or 0.53%, to $79.05, adding to Wednesday's strong gains.

(Reporting by Kevin Buckland Editing by Shri Navaratnam and Sam Holmes)