TOKYO: 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 at least two rate cuts this year.

The dollar remained on a downtrend, 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 new 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 that the Federal Reserve can cut interest rates twice this year.

Fed funds futures show 52 basis points of cuts this year, with one in September now fully priced.

The data provided palpable relief 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 1.44%. Hong Kong's Hang Seng advanced 0.9%, while Australia's stock benchmark rallied 1.5%.

Japan's Nikkei initially jumped as much as 1.3% but pared those gains to be up 0.6% amid pressure from some disappointing late earnings on the final day of the reporting season on Wednesday, and jitters over the sharp rally for the yen.

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

The dollar was last down 0.63% at 153.91 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 to 4.705% for the first time since April 5.

The dollar index, which measures the currency against the yen, euro, sterling and three other rivals, weakened 0.07% to a five-week low of 104.12.

The euro rose to $1.08925, the highest since March 21, and sterling reached $1.2697 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 70k."

Gold gained 0.39% to $2,395.39, pushing toward the all-time peak of $2,431.29 from April 12.

Brent futures rose 42 cents, or 0.5%, to $83.17 a barrel, while U.S. West Texas Intermediate crude (WTI) gained 43 cents, or 0.6%, to $79.06, adding to Wednesday's strong gains.

(Reporting by Kevin Buckland Editing by Shri Navaratnam)