Dealers eyed a line in the sand for the dollar on Tuesday as the U.S. currency held firm against most of its Asian counterparts, while China said its currency reforms did not necessarily mean a yuan appreciation.
Asian shares were trading lower as indices were seen consolidating after recent gains amid caution ahead of the corporate earnings season.
The dollar was up against all major Asian currencies bar the Taiwanese dollar and Indian rupee, although some traders said short-term profit-taking was likely responsible and further falls still possible.
Around 0445 GMT, the Hang Seng was down 0.52% at 23,087.42, Japan's Nikkei was down 1.85% at 9,411.92, Korea Composite Stock Price Index was down 1.32% at 1,864.97 and Singapore's Straits Time Index was down 0.25% at 3,155.55 points.
China's State Administration of Foreign Exchange (SAFE) on Tuesday urged market players to get used to two-way exchange rate movements, saying that its policy of currency reform did not necessarily equate to yuan appreciation.
But the country's foreign exchange regulator said that investors were still firm in their belief that the yuan would rise and that this would help drive capital to China over the rest of the year.
The China Securities Journal said in a front-page editorial that Beijing would have to control the pace of yuan appreciation and refrain from raising interest rates in order to ward off inflows of speculative capital.
"The financial crisis could escalate into a currency crisis," the newspaper said. "There will be no winner."
TALK DOWN
Chinese officials have repeatedly tried to talk down expectations of a yuan appreciation since freeing the currency from a 23-month peg to the dollar on June 19. But with the yuan up nearly two percent against the dollar since late August, concern is mounting that China could soon face a tide of hot money.
"Currency reform does not equate to yuan appreciation. The emphasis is more on the improvement of the currency formation mechanism," SAFE said in a report about China's first-half balance of payments.
In Tokyo a day after the dollar fell to a new 15-year low of 81.37 yen on ECB, one trader said the market expected a rate of between 81.50 and 83.00 ahead of a meeting of G20 finance chiefs in South Korea later this month.
The U.S. Fed's November meeting is the market's focal point, and minutes from its meeting on September 21, when it said it stood ready to provide more support for the economy and expressed concern about low inflation, are due at 1800 GMT.
The Australian dollar fell from near three-decade highs seen last week to $0.9790, but many traders still see the currency on track to hit parity and put Tuesday's falls down to short term profit taking.
Gold edged lower pressured by a stronger dollar, but expectations of further monetary easing by the U.S. Federal Reserve are likely to support the bull run in bullion. Spot gold inched down to $1,349.10 an ounce in early trading reversing gains in the previous session.
At 0445 GMT, Asian stocks were down 1.47% with the MSCI Asia ex-Japan index at 454.25.
China's central bank auctioned 22 bln yuan ($3.3 bln) of one-year bills in its open market operation on Tuesday at a yield of 2.0929 percent, unchanged from the last sale and in line with market expectations.
Traders had expected the People's Bank of China to keep the one-year bill yield steady because of its reluctance to send any market signals that it wants to lift benchmark interest rates.
The dollar index was up 0.10% at 77.520, still close to its lowest in nearly nine months.
