* S&P cuts Japan's long-term debt rating one notch
* ECB's Bini Smaghi expresses inflation concern
* Commodity prices sink; gold at 3-month low; oil down
* Global share prices slightly stronger
By Daniel Bases
NEW YORK, Jan 27 (Reuters) - The yen fell sharply against both the U.S. dollar and the euro on Thursday after Standard & Poor's cut Japan's long-term credit rating while the increased prospect of rising European interest rates weighed on commodities.
Wall Street stock indexes held near 29-month highs, boosted
by strong earnings from companies like heavy equipment maker
Caterpillar Inc
Standard & Poor's cut Japan's rating one notch to AA-minus, citing the country's ballooning deficit, which it said will further reduce Tokyo's already restricted fiscal flexibility.
The move will have a limited impact on Japan's ability to raise money on financial markets, but it raised a red flag with investors about other leading countries' fiscal imbalances.
"It is reasonable to expect that the Japanese downgrade will raise concerns over the sovereign rating of the U.S.," said Vasileios Gkionakis, macro strategist at Fulcrum Asset Management LLP in London, which oversees $900 million in assets.
The euro's gains were sharply curtailed against the U.S. dollar on profit taking and a rebound in the greenback based on lower gold prices.
Commodity prices were mostly lower as the prospect of rising interest rates in Europe grew after European Central Bank member Lorenzo Bini Smaghi said an expected rise in imported goods inflation could not be ignored. [ID:nFLARCE7IJ]
"The ECB has started to show more concern about secondary price pressures, and the market has acknowledged that," said Gavin Friend, currency strategist at nabCapital.
The euro hit a two-month high of $1.3759, but later pared gains to trade at $1.3708
Bini Smaghi's comments went to the heart of current investor concerns, highlighting the potential for inflation to prompt central banks to raise interest rates at a time when low rates are seen as key to boosting renewed economic growth.
Gold prices fell to a three month low,
U.S. light sweet crude oil
STOCKS EDGE UP
Global stock markets were mostly higher, but only just.
In midday New York trade, the Dow Jones industrial average <.DJI> was up 16.57 points, or 0.14 percent, at 12,002.01. The Standard & Poor's 500 Index <.SPX> was up 2.06 points, or 0.16 percent, at 1,298.69. The Nasdaq Composite Index <.IXIC> was up 15.59 points, or 0.57 percent, at 2,755.09.
Caterpillar
Movie rental company Netflix Inc
World stocks as measured by MSCI <.MIWD00000PUS> were up around 0.09 percent. The pan-European FTSEurofirst 300 <.FTEU3> index of top shares closed up 0.16 percent, led by strength in mining stocks.
Before the S&P announcement, Japan's Nikkei average <.N225> gained 0.7 percent.
Euro zone government debt yields rose as investors sold bonds, and the premium investors demand to hold paper from peripheral euro zone nations rather than German debt also widened.
Benchmark 10-year U.S. Treasuries gained back lost ground to trade unchanged, yielding 3.41 percent