Asian shares stay near highs, dollar hobbled by Fed

Asian shares held near three-year highs overnight on upbeat Chinese manufacturing data and expectations that US monetary policy will stay loose for some time, while the dollar was broadly soft.

Japan's Nikkei rose 1.3 per cent while the MSCI's broadest index of ex-Japan Asia-Pacific shares was flat, staying just under a three-year high hit three weeks ago. Hong Kong markets were closed for a holiday. European shares are expected to rise, with Britain's FTSE seen advancing up to 0.2 per cent and Germany's DAX 0.1 per cent.

China's official Purchasing Managers' Index showed factory growth rose to a six-month high in June, as expected, and a similar private survey also showed strong activity, reinforcing signs of stabilisation in the economy. A string of fairly upbeat but relatively minor US economic data published on Monday on the other hand did little to weaken expectations, rekindled after surprisingly weak first quarter growth data, that the US Federal Reserve will keep an easy monetary policy for some time. A leading indicator of US home sales jumped to an eight-month high in May while a gauge of factory activity in the Midwest eased slightly from a seven-month high.

"Fed Chairwoman Janet Yellen has shown concerns about the softness in the labour market. So we expect the Fed to maintain a policy aimed at supporting growth," said Takuro Nishida, deputy manager of investment planning at Sompo Japan Nipponkoa Insurance.

San Francisco Fed President John Williams said on Monday the US central bank will probably need to keep interest rates near zero for at least another year, even as he expressed optimism the economy is on a recovery path.

While this Thursday’s US employment report has potential to change that perception, investors for now are counting on an easy policy stance by the Fed, which undermines the currency’s yield attraction and puts pressure on the dollar. The dollar index hit a seven-week low of 79.759 on Monday and stood barely above that level at 79.840. As the dollar wilted, the euro rose to six-week high of $1.3698 on Monday and last traded at $1.3687, though the common currency is facing resistance at $1.37. The yen also hit a six-week high of 101.235 to the dollar the previous day before easing slightly to 101.43 yen to the dollar. It showed no reaction to mixed readings in the Bank of Japan’s tankan corporate survey. The Australian dollar gained 0.3 per cent to $0.9453 , just shy of its year-to-date peak of $0.9461 hit in April, after the Australian central bank held back from efforts to talk down the strong currency after a policy meeting. Gold hit a 2 1/2-month high of $1,332.10 per ounce and last stood at $1,327.80, helped by the dollar’s weakness as well as heightened geopolitical tensions.

Some market players said geopolitical concerns may be casting a shadow on risk sentiment, as the civil war in Iraq appeared to be deepening after a Sunni military leader was declared as caliph of a new Islamic state in lands seized across a swath of Iraq and Syria. While the news had little immediate impact on many financial markets, some players think there could be huge repercussions because the development could destabilise the oil-rich Middle East.

"The US employment growth has been pretty strong in the past several months so it makes me wonder why markets focused on such an old GDP data. I suspect that geopolitical concerns are also making investors cautious," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

Reuters