* U.S. bond yields, dollar steady after falling from highs
* Oil prices slip on doubts on production cut deal this week
* Battered emerging markets win reprieve
* Italian banking shares drop 3 pct on political worries
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Nov 28 (Reuters) - The dollar steadied after its biggest fall in almost a month on Monday, as doubts about a long-mooted OPEC output cut unsettled oil markets and “Trumpflation” trades that have gripped investors since the U.S. election.
Crude prices stumbled into the red as Wall Street prepared for a lower opening after the post-Thanksgiving weekend and both European and Japanese shares had difficult starts to the week.
Concerns about the fallout from Italy’s constitutional referendum this Sunday meant a 1.3 percent fall for its stocks, while oil’s struggles added to a 3.5 percent plunge on Friday, when it emerged that Saudi Arabia would not join talks with non-OPEC producers on potential supply cuts.
With oil so central to global costs, the drop in crude prices was rapidly cooling bets on a near-term jump in inflation, and tempering growing expectations of multiple rises in U.S. interest rates.
The dollar sank as much as 1.6 percent against the yen, going as low as 111.355 yen before recovering to 112.45 -- still its biggest fall against the yen since the start of the month..
“There has been a little test of the market but dollar looks like it has survived the test and wants to rally again,” said Saxo Bank’s head of FX strategy, John Hardy.
The greenback’s earlier retreat had hoisted the euro to an 11-day high of $1.0686 as it also got a lift from the election of Francois Fillon as the centre-right candidate in next year’s French presidential election.
The former prime minister is now favourite to become president, with a flash opinion poll suggesting he would easily beat far-right National Front leader Marine Le Pen in a second round run-off. Markets worry that Le Pen, who has promised a referendum on membership of the European Union if she wins, would threaten the future of the currency bloc.
In Italy, opinion polls predict defeat for the government on Sunday in what would be the third big anti-establishment revolt by voters this year in a major Western country, following Britons’ vote to leave the European Union and the election of Donald Trump as U.S. president. Prime Minister Matteo Renzi has promised to resign if he does not win.
Having lost more than half their value over the last year, Italian banking stocks fell 3 percent to their lowest in almost two months, while Italian government bonds also underperformed the wider rally in fixed income.
“Fears are that an Italian dissent and resulting market turmoil would dissuade already gutsy investors from daring to participate in desperately needed recapitalisations within a very troubled 4 trillion euro banking system,” said Mike van Dulken, Head of Research at Accendo Markets.
U.S. stock futures slipped 0.2 percent ahead of U.S. trading. Wall Street’s four main indexes all hit record highs last week, a feat last achieved in 1999.
With the dollar still fragile, gold however bounced back to $1,192 per ounce from Friday’s low $1,171.5, which was its lowest level since early February.
Industrial metals also remained red hot on hopes of strong demand for property and infrastructure investment in China and the United States.
Chinese steel futures jumped over 6 percent in Asia, while iron ore futures also gained about six percent and zinc, used to galvanise steel, powered to a nine-year high on the London Metal Exchange.
Asian shares rose 0.4 percent overnight, led by gains in Hong Kong and Taiwan though Japan’s Nikkei, which has been performing even better than Wall Street thanks to the yen’s fall, ended down 0.1 percent.
Emerging markets enjoyed some relief from their recent dollar-related drubbing, with stocks up 0.7 percent and currencies led higher by a 2 percent surge from the rand as South African’s sovereign debt avoided a downgrade to junk rating.
“It will be scary to think markets may fully reverse their moves since the elections, changing their mind that Trump’s policy may not be so good after all,” said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets.
In the bond markets, the yield on 10-year U.S. Treasuries was just starting to nudge up again ahead of the Wall Street restart, having dropped off its 16-month high of 2.417 percent, touched last week, to 2.3411 percent.
Investors still seemed to be playing the transatlantic divide.
German Bunds, Europe’s benchmark, saw their 10-year yield drop 3 basis points, and two-year German yields hit a new record low of minus 0.76 percent. Traders sense that lower oil prices combined with Italy’s referendum on Sunday could all but end any chances of the European Central Bank scaling back its support any time soon.
“If OPEC fails to give oil prices a boost this week, that will pour some cold water on the ‘Trumpflation’ trade that has continued to drive overall bond markets,” said Commerzbank rates strategist David Schnautz. (Additional reporting by Dhara Ranasinghe; Editing by Kevin Liffey)