Asian shares inched up on Friday, tracking US stocks which jumped overnight on strong US housing data and earnings, but concerns over the health of European banks weighed on investor risk appetite after Standard & Poor's downgraded Spain's rating.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2% while Japan's Nikkei average opened virtually flat.
The euro shed half a cent to around $1.3180 early on Friday after S&P's cut Spain's ratings by two notches to BBB-plus due to its deteriorating public finances.
The currency had climbed to a three-week peak near $1.3264 on Thursday. S&P's cut dented riskier currencies such as the Australian and New Zealand dollars early on Friday.
"The price action reflects strong market nervousness over the European problem, and that investors have yet to take on risk," said Junya Tanase, chief foreign exchange strategist at JPMorgan Bank in Tokyo.
The focus turns to the Bank of Japan's monetary policy decision due later in the session, with expectations running high for the central bank to take further accommodative steps.
Views remained mixed over specifics, with markets generally expecting a combination of options including an increase in the amount of asset purchases and an extention of the maturity of bond purchases.
"Markets have priced in an aggressive easing, and if the BOJ opts to just boost asset purchases by 5 trillion yen, as we forecast, it could spur an unwinding of the huge yen short positions and put upward pressures on the yen," Tanase said. If worries over the European situation intensified, that could also offset yen-selling pressures from the BOJ's further monetary stimulus, he added.
Thursday's data showing US contracts to purchase previously owned homes stood near a two-year high in March added to economic optimism already spreading following solid earnings and Federal Reserve's pledge earlier in the week to keep accommodative monetary policy as long as needed.
Commodities were bolstered on Thursday by the housing data and a weaker dollar which boosts demand for dollar-denominated raw materials, as well as a separate report showing US jobless claims fell only slightly last week, which fed expectations for a further Fed stimulus.
Crude oil futures retreated early on Friday, with US crude futures down 0.5% around $104 a barrel after settling up 0.4% at $104.55, the highest settlement since April 2. Brent crude settled at $119.92 a barrel for its highest close since April 13.
Asian credit markets were subdued, with the spread on the iTraxx Asia ex-Japan investment-grade index barely changed from Thursday.
Separate story in Europe
Europe was a different story, with European shares closing little changed on Thursday, pausing after a two-session rally.
Worse-than-expected results by Germany's biggest lender, Deutsche Bank <DBKGn.DE>, weighed on euro zone banks, which were also hit by data showing the euro zone's economic sentiment fell more than expected in April.
Underscoring an urgent task to restore investor confidence in the euro zone's fragile banks, the European Central Bank called on authorities on Thursday to set up a body to manage bank rescues in the euro zone. It came just as European policymakers were starting to see the idea of a rescue fund that would cover all banks in the currency bloc as possibly the only way to stamp out market jitters.
A potential crisis was averted, on the other hand, when Dutch politicians reached a deal on a 2013 budget on Thursday ahead of a European Union deadline set for next Monday. Its government earlier in the week resigned in a standoff over budget-cutting plans, rattling financial markets by creating a political vacuum in one of the euro zone's few remaining AAA-rated countries.
