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Asian shares slipped on Thursday and the dollar rebounded after Federal Reserve Chair Janet Yellen signalled that the US central bank is poised to pursue a path of interest rate hikes.
The dollar had been grinding lower in recent sessions, and marked its weakest levels since early December after US President-elect Donald Trump expressed concerns about the effects of a stronger greenback in a weekend interview.
Investors remained anxious ahead of Trump's inauguration on Friday, with many using the event as an excuse to lock in gains on their positions.
In a speech on Wednesday to the Commonwealth Club of California in San Francisco, Yellen had said that holding off too long to begin raising rates could “risk a nasty surprise down the road,” and that it “makes sense” for the Fed to gradually lift rates.
MSCI's broadest index of Asia-Pacific shares outside Japan slumped 0.4 per cent.
Hong Kong's benchmark Hang Seng index fell 0.6 per cent, while the Shanghai Composite Index was 0.1 per cent lower.
Short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening sharply heading into the long Lunar New Year holidays at the end of this month.
“The market is typically short of liquidity ahead of the Lunar New Year,” said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.
On Wall Street overnight, stronger financial shares helped push up the S&P 500, though the Dow Jones Industrial Average edged down.
Japan's Nikkei stock index was up 1 per cent, lifted by the tailwind of the weaker yen.
“The dollar clearly rose on Yellen's remarks,” said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo. “But with tomorrow's inauguration of Trump ahead, Japanese investors still might take a cautious stance today.”
While traders expect the incoming US administration to adopt stimulus policies to lift growth and inflation and keep the Fed on course for rate hikes, many investors worry about the potential fallout of Trump's protectionist policies.
The dollar index, which tracks the greenback against a basket of six major counterparts, rose 0.3 per cent to 101.22.
The dollar gave up early session gains against the yen and inched down to 114.48, but stayed well above the previous session's low of 112.57 yen.
Sterling was 0.1 per cent higher, at $1.2275, after it shed more than 1 per cent on Wednesday. The pound had surged 3 per cent on Tuesday after British Prime Minister Theresa May's speech reassured investors worried about a “hard Brexit".
The euro firmed 0.1 per cent on the day to $1.0641 ahead of the European Central Bank's regular policy meeting later in the session. The ECB surprised markets last month by saying it would trim monthly bond purchases in April.
None of the economists polled by Reuters last week expected any change at Thursday's meeting. They were unanimous in saying that the ECB's next move, after April's planned cut, would be to further taper its quantitative easing.
Crude oil prices regained ground lost in the previous session when the dollar strengthened, with investors turning their attention to upcoming government data on US inventories. A stronger dollar makes dollar-denominated commodities more expensive for the holders of other currencies.
US crude added 0.8 per cent to $51.48 per barrel, after shedding 2.67 per cent on Wednesday. Brent crude rose 0.8 per cent to $54.36 after slipping 2.79 per cent.
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