By Lisa Twaronite
TOKYO (Reuters) - Asian shares edged higher on Monday, with investors wary of a deepening crisis in Ukraine and a downbeat China manufacturing survey, while the euro touched a fresh one-year low ahead of this week's European Central Bank meeting.
Ukrainian President Petro Poroshenko warned a "full-scale war" was imminent if Russian troops continued to advance in support of pro-Moscow rebels, while U.S. and European leaders threatened Moscow with further sanctions.
But Friday's Wall Street cheer managed to offset the geopolitical concerns and the China survey. U.S. shares climbed ahead of a three-day weekend for Monday's U.S. Labor Day holiday.
"Naturally, developments between Russia and the Ukraine will be in the cross sights. However, despite more concerning rhetoric that tensions are nearing a point of no return, we haven't really seen a heavy bias towards defensive trading strategies today," IG chief market strategist Chris Weston wrote in a note to clients.
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Financial spreadbetters predicted flat openings in European markets, with Britain's FTSE 100 expected to open between 4 points higher and 7 points lower, and both Germany's DAX and France's CAC 40 seen opening unchanged to 1 point higher.
MSCI's broadest index of Asia-Pacific shares outside Japan shrugged off early losses and was up about 0.3 percent, moving back toward last Thursday's six-and-a-half-year peak.
Japan's Nikkei stock average ended up about 0.3 percent, taking back some of the ground lost in August, when it shed 1.3 percent.
The gains came even after an official index of China's manufacturing sector fell from a 27-month high to 51.1 in August, a government study showed on Monday, slightly less than forecast and adding to signs of growing softness in the Chinese economy. Still, it was the second-highest reading this year.
The final HSBC/Markit Purchasing Managers' Index also dropped, slipping to 50.2 in August, roughly in line with a preliminary reading of 50.3 and only a shade above the 50-point mark that demarcates an expansion in activity from contraction.
"The economy still faces considerable downside risks to growth in the second-half of the year, which warrants further policy easing," said Qu Hongbin, an economist at HSBC.
But Friday's gains on Wall Street underpinned markets. The S&P 500 index set a new closing high, ending the day above the 2,000 milestone for the third time. For the month, the Dow Jones industrial average rose 3.2 percent, the S&P 500 added 3.8 percent, and the Nasdaq Composite gained 4.8 percent.
The dollar index edged up to 82.764 in Asian trade, not far from Friday's 13-month high of 82.773.
"Driven by the real and anticipated divergence in economic performance and trajectory of monetary policy, the long-anticipated U.S. dollar recovery has begun," Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said in a note to clients.
"As is evident in the positioning of the futures market, and confirmed by anecdotal evidence, speculative participants have amassed a significant large U.S. dollar position," Chandler said.
Speculators raised their bullish bets on the U.S. dollar for a second week to their highest in more than two years, according to data from the Commodity Futures Trading Commission released on Friday. The dollar's net long position soared to $32.92 billion in the week ended Aug. 26. [IMM/FX]
The dollar rose slightly to 104.17 yen, moving back toward last week's seven-month high of 104.49.
INFLATION BELOW ECB 'DANGER ZONE'
The euro, meanwhile, edged down about 0.1 percent to $1.3124 after dropping as low as $1.3119 and reaching lows unseen since early September 2013, ahead of the European Central Bank meeting on Thursday.
Data on Friday showed inflation in the euro zone slowed to a fresh five-year low of 0.3 percent in August, well below the ECB's "danger zone" of 1.0 percent.
Some analysts, including those at Nomura, are even betting that the ECB will cut all key interest rates by a further 10 basis points, setting a larger negative deposit rate of minus 0.20 percent.
A Reuters poll on Thursday before the euro zone inflation data put a 40-percent chance on the ECB conducting quantitative easing through the purchase of sovereign bonds by March next year.
The Bank of Japan will also meet this week, but is expected to hold monetary policy steady for now despite a spate of weak economic data last week.
Japanese household spending fell more than expected, the jobless rate inched up and factory output was weak in July, suggesting that April's sales tax hike could drag down the economy longer than expected.
But data released early on Monday showed Japanese companies raised spending on plant and equipment in the April-June period by 3.0 percent compared with the same quarter last year, showing a moderate recovery in business investment. But a quarter-on-quarter decline suggests revised data will likely confirm the economy's deepest contraction since the March 2011 disaster.
"The Japanese economic recovery seems weaker than initially expected. Consumption has fallen more than expected," said Hiroshi Ono, the head of equity investment at Sumitomo Life Insurance.
Britain, Canada and Australia will also hold monetary policy meetings this week, starting with the Reserve Bank of Australia (RBA) on Tuesday.
The RBA is widely expected to keep its cash rate steady at 2.5 percent for the 13th straight policy meeting.
In commodities trading, palladium climbed about 0.4 percent to $903.25 an ounce, near a 13-1/2 year peak of $907 hit on Friday. Spot gold fell slightly to $1,287.39 an ounce, after posting a small weekly gain.
U.S. crude slipped about 0.2 percent to $95.81 a barrel after marking a monthly loss in August.
(Additional reporting by Koh Gui Qing in Beijing and Hideyuki Sano in Tokyo; Editing by Eric Meijer and Simon Cameron-Moore)
