Filomena Scalise

Tokyo - Asian shares were firm near a three-year high on Tuesday on upbeat Chinese manufacturing data and expectations that US monetary policy will stay loose for some time, while the dollar was broadly soft.

Japan's Nikkei rose 1.4 percent while the MSCI's broadest index of Asia-Pacific shares outside Japan erased earlier losses to stand flat, staying within 0.2 percent from a three-year high hit three weeks ago.

China's official Purchasing Managers' Index showed factory growth rose to a six-month high in June, as expected, and a similar private survey also showed strong activity that month, reinforcing signs of stabilisation in the economy.

A string of fairly upbeat but relatively minor US economic data published on Monday did little to weaken expectations, rekindled after surprisingly weak first quarter growth data, that the US Federal Reserve will keep an easy monetary policy for some time.

A leading indicator of US home sales jumped to an eight-month high in May while a gauge of factory activity in the Midwest eased slightly.

“Fed Chairwoman Janet Yellen has shown concerns about the softness in the labour market. So we expect the Fed to maintain a policy aimed at supporting growth,” said Takuro Nishida, deputy manager of investment planning at Sompo Japan Nipponkoa Insurance.

San Francisco Fed President John Williams said on Monday the US central bank will probably need to keep interest rates near zero for at least another year, even as he expressed optimism the economy is on a recovery path.

While Thursday's US employment report has potential to change that perception, investors for now expect the Fed to keep interest rates near zero for more than a year - thus undermining the currency's yield attraction and putting pressure on the dollar.

The dollar index hit a seven-week low of 79.759 on Monday and stood barely above that level at 79.833.

As the dollar wilted, the euro rose to six-week high of $1.3698 on Monday and last traded at $1.3687, though the common currency is facing resistance at $1.37.

The yen eased slightly to 101.52 yen to the dollar after hitting a six-week high of 101.235 to the dollar the previous day, showing no reaction to mixed readings in the Bank of Japan's tankan corporate survey.

The Australian dollar changed hands at $0.9417, not far from its year-to-date peak of $0.9461 hit in April as it awaits a monetary policy statement from the Reserve Bank of Australia at 04h30 GMT, though no change is expected.

Gold hit a 2 1/2-month high of $1,332.10 per ounce and last stood at $1,327.80, helped by the dollar's weakness as well as heightened geopolitical tensions.

Some market players said geopolitical concerns may be casting a shadow on risk sentiment, as the civil war in Iraq appeared to be deepening after a Sunni military leader was declared as caliph of a new Islamic state in lands seized across a swath of Iraq and Syria.

While the news had little immediate impact on many financial markets, some players think there could be huge repercussions because the development could destabilise the entire region of the oil-rich Middle East.

“The US employment growth has been pretty strong in the past several months so it makes me wonder why markets focused on such an old GDP data. I suspect that geopolitical concerns are also making investors cautious,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

Ukrainian President Petro Poroshenko said on Tuesday government forces would renew offensive operations against pro-Russian rebels and “free our lands”, hours after a ceasefire to make way for peace talks with the rebels expired.

Still, oil prices eased from nine-month highs hit last month on easing concerns about supply disruption in Iraq as the government forces appeared to be keeping Sunni militants away from major refineries in the country.

US crude futures traded at $105.57 per barrel, off high of $107.73 hit less than two weeks ago. - Reuters