Asian shares rose on Tuesday on hopes for further stimulus from the European Central Bank and the US Federal Reserve, both of which hold policy meetings this week, but scepticism about the long-term effectiveness of any ECB actions capped the euro.
MSCI's broadest index of Asia-Pacific shares outside Japan gained 1% to its highest since May 11 and was set for a monthly gain of 3.2% compared to a near flat showing last July.
The impact of the three-year euro debt crisis on Asia was evident on Tuesday, however, with Japan's Manufacturing Purchasing Managers Index (PMI) falling at its fastest pace since last year's earthquake and tsunami, as demand for Japanese goods slows in Europe and China.
Market sentiment has been underpinned by speculation the ECB, at a meeting on Thursday, may resume its bond buying programme to force down rising Spanish and Italian borrowing costs, but uncertainty persists partly because Germany has repeated its opposition to such a step.
The Fed has also come under greater pressure to act as early data for the third quarter has disappointed, but many economists do not expect further easing until September. The Fed starts a two-day interest rate policy meeting on Tuesday, ahead of a key nonfarm payrolls report due on Friday.
"There is a bit of positive sentiment supporting the market. The optimism stems from the upcoming central bank meetings and local data is helping too," said Stan Shamu, market strategist at IG Markets, referring to Australia's smaller-than-expected decline in building approvals in June.
US stocks finished mostly flat on Monday as investors paused following the best two-day run this year, while European shares hit three-month highs to end above a key technical level.
Japan's Nikkei stock average rose 0.5%.
The euro edged up 0.2% to $1.2285,, still below a three-week high of $1.2390 touched on Friday but well above a two-year low around $1.2042 reached last week. The euro was also up 0.2% against the yen at 95.95.
The Australian dollar hit a four-month high against the US dollar around $1.0530 on Tuesday and an all-time peak versus the euro around A$1.1646 in offshore trade, as speculation of monetary stimulus spurred investor appetite for high-yielding currency.
But caution remained about the effect of any measures from the ECB, given doubts about central bank action being sufficient to resolve the euro zone's fiscal woes.
"Even if the ECB resumes its bond buying programme, the rise in the euro will likely just be met with selling," said Hideki Amikura, forex manager at Nomura Trust Bank, noting that the euro would at best rise to around 98 yen, for example.
Expectations for imminent ECB action supported Italy's debt auction on Monday, with Rome selling 5.48 billion euros in bonds, near the top of its planned issue range, and benchmark 10-year borrowing costs falling below 6% for the first time since April. But 10-year yields stayed elevated near 6%.
Doubts remain
Brent crude held above $106 per barrel but was capped by caution among investors that any fresh stimulus measures coming from the ECB or the Fed may not be enough to revive stuttering economies.
Copper added 0.5% to $7,579.25 a tonne, supported by stimulus hopes, a weaker dollar and gains in riskier assets such as stocks.
Gold held steady at $1,623.21 an ounce, as investors cautiously awaited monetary policy decisions, a key factor driving bullion prices.
Gold has struggled to rise above key resistances on a lack of strong investor appetite. Holdings at the world's biggest gold-backed exchange-traded fund, SPDR Gold Trust, saw outflows for a fifth week in a row last week, marking its longest such losing streak in about 18 months and on track for its biggest monthly outflow this year in July of 30.9 tonnes.
Later on Tuesday, India's central bank is expected to leave interest rates unchanged, putting more weight on high inflation than the slowest growth in almost a decade.
The euro zone debt crisis has damaged economic activity and dampened morale around the world, with the Markit/JMMA Japan Manufacturing Purchasing Managers Index falling to a seasonally adjusted 47.9 in July from 49.9 in June.
On Monday, the European Commission's sentiment index showed the euro zone's business sentiment fell to a 34-month low in July, near levels last seen after the collapse of Lehman Brothers.
Asian credit markets held steady, after the spread on the iTraxx Asia ex-Japan investment-grade index fell to its lowest since early April on Monday in thin trading volumes.
