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Asian shares held near one-month lows on Tuesday as investors braced for a possible hawkish shift in the US Federal Reserve's policy stance as the Fed begins a two-day policy meeting later in the day.
MSCI's broadest index of Asia-Pacific shares outside Japan was little changed near one-month low hit on Monday after seven consecutive days of falls. Japan's Nikkei stock average shed 0.3%, catching up after Tokyo markets were closed for a local holiday on Monday.
Speculation that the Fed could raise interests sooner and faster than previously expected have rattled many share markets around the global and supported the US dollar.
"As global bond markets show early signs of adjustment to an emerging higher interest rate environment, yield plays like the major banks, (phone company) Telstra and property trusts are losing favour," Michael McCarthy, chief market strategist at CMC Markets in Sydney, said in a note to clients.
The Fed's Open Market Committee will begin its regular two-day policy meeting later on Tuesday, and investors will be scanning the outcome for clues on the timing of the first US rate hike in more than eight years.
US central bank policymakers will also release fresh economic and interest-rate projections, extending their forecast horizon through 2017.
They have said they do not expect to raise rates until 2015, but recently strong US economic data has led Fed officials to acknowledge they may need to act sooner than they thought just a few months ago.
"At Wednesday's FOMC meeting, changes to Fed forecasts and wording that reflects expectations that rates could go higher sooner than expected should provide support" to the US dollar, strategists at Barclays said. "We also look for a modest steepening in the median policy path and more clarity on exit principles."
Wall Street had a mixed session on Monday also after weekend data showed China's factory output in August grew at its slowest pace in nearly six years, raising fears the world's second-largest economy was losing momentum.
"The fall in the real estate sector activity is affecting output. Everyone knows August is pretty weak, so if things improve in September, that would reassure investors," said Hirokazu Yuihama, senior strategist at Daiwa Securities.
The dollar index, which tracks the greenback against a basket of six major rivals, was steady on the day at 84.166, not far from its 14-month peak of 84.519 scaled a week ago.
Keeping pressure on the euro, the Organisation for Economic Cooperation and Development projected lower growth for major economies on Monday and urged much more aggressive stimulus from the European Central Bank to ward off the risk of deflation.
The euro was treading water at $1.2939, while the dollar edged down slightly against its Japanese rival to 107.15 yen but was still close to a six-year high of 107.39 yen touched on Friday.
The yield on the benchmark 10-year US Treasury note stood at 2.574% in Asia, not far from Monday's US close of 2.591%. It hit a two-month high of 2.651% on Monday, before paring its rise on news of a drop in last month's US manufacturing output.
US crude edged down about 0.1% to $92.79 a barrel, pressured by the weekend data from China that cast doubt on the strength of global demand. On Monday, the expiring Brent contract for October dropped to its price since July 2012, while the new front-month contract added 0.2% in Asian trade to $98.07.
Spot gold was steady on the day at $1,232.36 an ounce, supported by the Chinese data but undermined by expectations that the Fed will start hinting at interest rate hikes. On Monday, it fell to its lowest level since January.
