Asian shares fell on Friday, tracking overnight weakness in global equities after senior Federal Reserve officials expressed concerns about continuing to expand stimulative bond buying, but the dollar extended gains as U.S. debt yields rose.
Minutes from the Fed's December policy meeting released on Thursday showed some voting members of the Federal Open Market Committee were increasingly concerned about the potential risks of the Fed's asset purchases on financial markets, even if it looked set to continue an open-ended stimulus program for now.
The Fed's asset-buying policy has been pivotal in underpinning investor risk appetite and supporting global equities, so the more hawkish Fed minutes unnerved financial markets on Thursday, driving benchmark U.S. Treasury yields up to a near eight-month high and weighing on equities and oil, while lifting the dollar.
The dollar was also bolstered by data showing U.S. private-sector hiring improved in December, raising hopes for a strong monthly payrolls report due later in the day, a key gauge to the U.S. economy and the Fed's future policy course.
The rise in the dollar hit precious metals and oil on Friday as a firmer dollar makes dollar-based assets more expensive for non-dollar holders.
The Fed's minutes prompted investors to book profits from rallies immediately after U.S. lawmakers earlier this week narrowly avoided falling off the "fiscal cliff" of automatic taxes increases and spending cuts, which risked derailing the economy.
"Market moves largely reflect positioning after the recent rallies and before the nonfarm payrolls, which could tip the markets either way," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slid 0.8 percent, after scaling its highest since August 2011 on Thursday.
Australian shares slipped 0.4 percent, retreating from a two-day rally which took shares to their highest in more than 19 months on Thursday. Hong Kong shares .HSI tumbled 0.8 percent but Shanghai shares .SSEC inched up 0.2 percent.
The dollar hit its highest since July 2010 against the yen at 87.78 while the euro fell to a three-week low of $1.3019 on Friday. The U.S. dollar .DXY also touched a near four-week high against a basket of major currencies.
"Dollar-positive momentum is solid as the fiscal cliff was averted, the overnight data was good and yields were rising. I won't be surprised to see the dollar rise to 90 yen soon," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.
"Despite repeated Japanese intervention, the dollar had refused to strengthen in the past, but now, it's advancing without any action, suggesting the direction has completely changed to support continued dollar buying," Maeba said.
The yen's tumble pushed Japan's benchmark Nikkei stock average .N225 up 2.6 percent to its highest since March 2011, outshining the Asian regional bourses. Japanese markets were closed from December 31 to January 3 for the new year's holidays. .T
Japanese government bonds skidded on their first trading day of 2013, with benchmark yields hitting a 3 1/2-month high in line with surging Japanese equities and a drop in U.S. Treasuries prices.
FISCAL CLIFF VS DATA
U.S. President Barack Obama and congressional Republicans face tough talks on spending cuts and an increase in the nation's debt limit as the hard-fought deal to avert the fiscal cliff covered only taxes and delayed decisions on expenditures until March 1.
But investor sentiment was supported by recent data showing activity in China's services sector and at U.S. factories expanded in December, which brightened the outlook for global growth.
"The minutes have added a fresh degree of uncertainty into the investment climate, which is likely to mean a steeper yield curve. But equity investors should take heart from the fact that the Fed's perception is qualified on an improving economy," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, said in a note to clients.
China's services sector saw its slowest rate of expansion in nearly a year and a half in December, a private sector survey showed on Friday, but underlying growth revival remained intact, even if it were modest.
The U.S. economy likely added 150,000 jobs in December, according to a Reuters survey, up from 146,000 in November. The unemployment rate is expected to hold steady at 7.7 percent.
Resolution of the U.S. fiscal cliff crisis could spell trouble for some Asian assets as investors could start to shift some money out of overpriced Asian investments in favor of the U.S. on brightening prospects for American stocks.
U.S. crude fell 0.8 percent to $92.17 a barrel while Brent shed 0.7 percent to $111.38.
U.S. gold futures for February dropped more than 1 percent to around $1,645 an ounce on Friday while spot gold also fell 1 percent to around $1,645, dragging silver down more than 2 percent to $29.48.
Despite the decline in equities markets, sentiment in Asian credit markets remained upbeat, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by two basis points.