Asian shares inched higher on Thursday but gains were limited as investors waited for more clues over the timing and extent of any further stimulus to tackle the euro zone's debt crisis and support global growth.
Strong U.S. industry output report on Wednesday, which followed similarly solid retail sales and employment data for July released earlier in the month, bolstered the dollar and weighed on safe-haven government bonds.
"We are seeing increasing signs of stabilisation in the U.S.," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
"The U.S. improvement is in contrast to the persistent weakness elsewhere. So that's dollar positive because (interest) rate spreads move in favour of the dollar," he said, adding that the dollar may rise towards 80 yen in the short term.
The dollar rose to a one-month high against the yen around 79.35 yen and also firmed against the euro, which eased 0.1 percent against the dollar to $1.2278.
Brent crude held steady around $116.21 a barrel while U.S. crude also was nearly flat at $94.34.
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MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.1 percent, with Australian shares leading the pack with a 0.8 percent gain, buoyed by good earnings results. Japan's Nikkei stock average surged 1.7 percent as a weaker yen revivied exporters.
European stocks were likely to track Asian equities higher, with a 0.1 percent rise in U.S. stock futures also pointing to a firm Wall Street start. Financial spreadbetters called the main indexes in London, Paris and Frankfurt to open up as much as 0.5 percent.
"Although economic data remain mixed, signs of stabilization continue to emerge," Barclays Capital analysts wrote in a note, adding that recent U.S. data has scaled back expectations for the Federal Reserve to embark on another round of bond buying at its meeting in September.
"An undoing of market expectations on Fed easing has been reflected in higher U.S. yields, but has yet to affect market volatility, which remains at low levels ... The lack of news in the euro area belies tensions there, as key European decisions lie ahead," they said.
Greek Prime Minister Antonis Samaras will next week hold his first meetings with euro zone leaders since taking office, aiming to assure them he will honour a pledge for more austerity while seeking more time to pull it off.
BOND YIELDS JITTERY
Markets have been driven by expectations for policy responses since the European Central Bank earlier this month suggested it could start buying sovereign bonds to ease borrowing costs for Spain, under certain conditions.
Sluggish U.S. growth in the second-quarter and global growth significantly undermined by the euro zone crisis have also raised hopes for the Fed to take further easing steps.
While generally tepid growth prospects would justify more action, government bond markets have reacted negatively on uncertainty over the prospect of any Fed easing, as recent U.S. data has pointed to recovery in third-quarter.
Markets will be watching the Jackson Hole meeting of central bankers and economists at the end of the month, U.S. jobs data due early in September and the ECB's policy meeting early next month for clues over policy actions, analysts said.
The 10-year Japanese government bond yield rose to a two-month high of 0.850 percent, well above its nine-year low of 0.720 percent hit in July. In Asia on Thursday, 10-year Treasury yields extended a two-week rising trend to hit its highest in about three months of 1.85 percent. That was also up sharply from a record low 1.38 percent touched on July 25.
A slew of data is due later on Thursday, including U.S. housing starts and building permits for July, weekly jobless claims and the Philadelphia Federal Reserve Bank's August business activity survey.
"From the point of their impact to long-term U.S. yields, these data warrant attention," said Junya Tanase, chief currency strategist at JPMorgan Chase. "If they are weak, it could refuel
expectations for the Fed's further quantitative easing and potentially lead to yields falling back," he said.
Meantime, gold suffered from the lower expectations for easing, to hover near $1,600 an ounce.
Following a bunch of dismal data earlier this month, China suggested it could also take more stimulus steps.
Premier Wen Jiabao was quoted by state media as saying on Wednesday that China's economy faces big headwinds though cooling inflation is giving the government more leeway to manoeuvre monetary policy.
Asian credit markets were subdued, with the spread on the iTraxx Asia ex-Japan investment-grade index barely changed.