Asian share market sentiment was cautious on Thursday after U.S. President Barack Obama vowed to fight Islamic State militants, while the dollar pushed to fresh six-year highs against the yen.
But Chinese inflation data pointing to an economy losing momentum stirred some optimism among investors for further stimulus to prop up the world's second-largest economy.
Obama told Americans in a speech late on Wednesday that he had authorised U.S. air strikes for the first time in Syria and more attacks in Iraq in a broad escalation of a campaign against the Islamic State militant group.
He said he would hunt down Islamic State militants "wherever they are."
While overnight gains on Wall Street underpinned shares, the risk-averse mood helped push MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS down about 0.1 percent. Hong Kong's Hang Seng Index .HSI and the Shanghai Composite Index.SSEC, however, both edged up after the China inflation data raised the possibility of more stimulus.
China's consumer prices cooled more than expected in August, up 2.0 percent from a year earlier, missing market expectations for 2.2 percent and down from 2.3 percent in July. The data provides more evidence of economic slowdown but economists are divided over whether Beijing will use the extra room to announce fresh stimulus measures.
"The comfortable inflation figure will provide sufficient room for the central bank to loosen its monetary policy. The possibility of an interest rate cut cannot be ruled out in coming months," said Li Huiyong, economist at Shenyin & Wanguo Securities in Shanghai.
Japan's Nikkei stock average .N225 added 0.8 percent to approach an eight-month high, taking solace from the weaker yen and upbeat data released before the market opened.
Confidence at big Japanese manufacturers turned positive in July-September and business conditions are expected to improve further in the following quarter, a government survey showed on Thursday.
The greenback rose to a six-year high of 107.02 yen JPY=, and was last up about 0.1 percent on the day at 106.92 yen.
The euro EUR= edged down 0.1 percent to $1.2904, but remained well above its 14-month low of $1.2859 hit on Tuesday.
Rising U.S. yields gave the dollar a lift. The yield on the benchmark U.S. 10-year note US10YT=RR stood at 2.532 percent, near its U.S. close of 2.536 percent on Wednesday, when it rose to its highest in more than a month.
By contrast, the Bank of Japan drove a short-term interest rate below zero this week, a sign it will continue its aggressive asset purchases.
BOJ Governor Haruhiko Kuroda on Thursday said he told Prime Minister Shinzo Abe that the central bank will not hesitate to ease policy further if its 2 percent inflation goal becomes difficult to achieve, though he also told Abe that a positive economic cycle in Japan is firmly in place.
Traders sold Treasuries to prepare for a more hawkish stance on monetary policy from the U.S. Federal Reserve at its next policy meeting on Sept. 16-17.
Analysts said the Fed could hint at an earlier-than-expected interest rate hike on steady U.S. jobs growth. A study from the San Francisco Fed released on Monday suggested that investors underestimated the speed at which the Fed might raise rates.
But the Federal Open Market Committee could also trigger a dollar correction, some strategists said.
"If Fed Chair Janet Yellen continues to downplay the improvements in the U.S. economyand fails to provide sufficient guidance on what happens after quantitative easing ends, the disappointment could lead to a wave of profit taking in USD/JPY," Kathy Lien, managing director at New York's BK Asset Management, wrote in a note to clients.
Strong Australian jobs data heightened expectations that no more interest rate cuts lie ahead, and helped the Aussie dollar recover from five-month lows. The Aussie rose 0.3 percent on the day to $0.9180 AUD=D4, off Wednesday's low of $0.9113, after the country's employment surged by the most on record.
Spot gold prices XAU= edged down about 0.1 percent to$1,247.29 an ounce, pressured by expectations of higher rates from the Fed.
U.S. crude CLc1 inched 0.1 percent lower to $91.59 per barrel, weighed down by rising supply, as OPEC lowered projected demand for its crude and data showed a jump in U.S. refined product stocks.
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