By Hideyuki Sano
TOKYO (Reuters) - Asian shares stepped back from a one-year high on Wednesday after the influential New York Federal Reserve Bank president said the Fed could raise interest rates as soon as September, prompting investors to pause after rallies in recent weeks.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.05 percent while Japan's Nikkei <.N225> rose 0.4 percent, paring some of Tuesday's sharp losses.
Wall Street shares also retreated from record highs, with the S&P 500 losing 0.55 percent.
New York Fed President William Dudley said that as the U.S. labour market tightens and as evidence of rising wages builds, "we're edging closer towards the point in time where it will be appropriate I think to raise interest rates further."
Comments from Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen, also included an unusual warning on low bond yields and were seen as more hawkish than a cautious message last month.
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Atlanta Federal Reserve Bank President Dennis Lockhart, seen as centrist, concurred saying he did not rule out a September hike - something markets have almost completely priced out.
"Clearly the Fed seems to think the market's pricing of a September rate hike is too low. Today's minutes of the Fed's July policy meeting could be more hawkish than market expectations," said Tomoaki Shishido, fixed income strategist at Nomura Securities.
Yet markets still only half believe their comments, remembering that the Fed ended up keeping rates on hold in June even after Fed officials talked up the possibility of rate hike in preceding weeks.
Yields on two-year notes briefly touched a near three-week high of 0.758 percent but failed to reach the July peak of 0.778 percent and were last at 0.750 percent.
Fed funds rate futures are pricing in a 50 percent chance of a rate hike by December, a small increase from below 50 percent earlier this week.
Dudley's comments also pulled the dollar from seven-week lows hit just after tame U.S. inflation data.
U.S. consumer prices were unchanged in July from the previous month, following two straight monthly increases of 0.2 percent.
The dollar's index against a basket of six major currencies <=USD> plunged to 94.426 its lowest level since late June before paring some of losses to stand at 94.844, still down 0.9 percent on the week.
The euro rose to as high as $1.1323 on Tuesday and last fetched $1.1275, maintaining its 0.9 percent gains the previous day.
The dollar hovered at 100.31 yen after having fallen to as low as 99.55, coming within sight of its 2 1/2 year trough of 99.00 set on June 24 after the Brexit vote.
"As the world economy is slowing down, many countries now need a cheaper currency to support share prices. The U.S. wants a cheaper dollar and so does China, leaving the yen taking the brunt," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.
The British pound recovered further from Monday's five-week low against the dollar and rising from three-year lows against the euro after UK inflation was stronger than expected.
The data was the first in a run of July economic data that should show some of the initial impact of the Brexit vote on the economy.
The pound stood at $1.3037 , holding on to its 1.3 percent gains on Tuesday. Against the euro, it strengthened to 86.51 pence per euro after having hit a three-year low of 87.245 pence on Tuesday.
The pound is bracing for U.K. jobless data later in the day.
(Reporting by Hideyuki Sano; Editing by Eric Meijer)