By Saikat Chatterjee
HONG KONG (Reuters) - Asian stocks slipped on Tuesday and the dollar firmed as investors braced for policy decisions from major central banks this week, with all eyes on the Bank of Japan's decision later in the day after it stunned markets in January by adopting negative rates.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.7 percent, backing off a 2-1/2-month high on Monday.
It was dragged down by a 1.2 percent fall in resource-heavy Australian shares and a 0.7 percent drop in Hong Kong.
"Markets are not expecting another round of stimulus so soon after January's surprise from the BOJ and overall sentiment has become more cautious after the recent risk rally," said Frances Cheung, a rates strategist at Societe Generale in Hong Kong.
With the global economy slowing and many countries facing deflationary pressures, investors' attention was squarely on policy decisions from the world's major central banks.
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The Bank of Japan is expected to announce its policy decision between 0230-0430 GMT on Tuesday, followed by the U.S. Federal Reserve on Wednesday and the Bank of England and the Swiss National Bank on Thursday.
The BOJ is widely expected to keep policy unchanged after its surprise decision in January to introduce negative interest rates raised worries about banks' profitability.
Notwithstanding the BOJ's decision, Steven Englander, global head of G10 FX strategy at Citibank, reckons investors are more interested in the Fed statement on Wednesday to gauge how important global vulnerabilities stack up against an upswing in domestic activity for U.S. policymakers.
The Fed is unlikely to raise rates this week but it will likely make clear that as long as U.S. inflation and jobs continue to strengthen, economic weakness overseas won't stop rates from rising fairly soon.
A consensus in the market is that fresh forecasts from the Fed's 17 officials released after the meeting will signal perhaps two or three rate hikes this year, a retreat from their projection in December for four or more increases in 2016.
Financial markets are much more cautious with Fed fund futures are pricing in a 50 percent probability of a rate increase by June and one full rate hike by December.
The mood in credit markets also was noticeably more cautious, with investors happy to stay in high quality government debt such as U.S. Treasuries and German Bunds rather than venturing into higher-yielding corporate paper.
The 10-year U.S. notes yield stood at 1.969 percent, off a six-week high of 1.986 percent hit on Friday.
In credit markets too, a recent rally seems to be petering out. An index of high yield credit fell after rising 9 percent over the last month.
Even oil prices, whose rebound over the last month triggered a global rally in risky assets, were running out of steam on concerns that a six-week market recovery may have gone beyond fundamentals. U.S. crude stockpiles continue to rise and Iran is seen showing little interest in joining major producers in freezing production.
U.S. crude futures last traded at $37.05 a barrel, up slightly from Monday.
On Monday, they fell 3.4 percent to $37.18 a barrel, while Brent finished down 2 percent at $39.53.
In currency markets, the euro slipped further from its three-week high hit after European Central Bank President Mario Draghi indicated he does not plan further cuts in interest rates.
The euro traded at $1.1111, off Thursday's high of $1.1218. The yen was little changed at 113.64 to the dollar while the British pound changed hands at $1.4276, off Friday's three-week high of $1.4437.
(Additional reporting by Hideyuki Sano in TOKYO; Editing by Shri Navaratnam and Kim Coghill)