Asian shares edged up in early trade on Tuesday following a rebound in the final hour of New York trading as investors turned their attention to an expected hefty Federal Reserve interest rate hike this week to tackle inflation.

Even more so than the Ukraine war or corporate earnings, the actions of the US central bank are driving market sentiment as traders try to position themselves for a rising interest rate environment.

Early in the Asian trading day, MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.7 per cent, while US stock futures, the S&P 500 e-minis rose 0.11 per cent.

Japan's Nikkei advanced 0.38 per cent and Australian shares climbed 1.1 per cent.

China's blue-chip CSI300 index was 0.54 per cent higher in early trade. Hong Kong's Hang Seng index opened up 0.92 per cent.

On Monday, Wall Street's main indexes closed higher after seesawing during the session as investors wait to see how aggressively the Fed will hike interest rate hikes at this week's policy meeting.

The S&P 500 and the Nasdaq Composite rebounded after logging their worst weekly percentage drop since June, as markets were fully priced for a rise in interest rates of at least 75 basis points at the end of Fed's September 20-21 policy meeting.

Interest rate expectations

Markets are priced for rates to climb as high as 4.5 per cent by early 2023, compared with the Fed's current 2.25-2.5 per cent policy rate range. That is high enough to take a bite from growth, and is holding down bond yields at the longer end of the curve.

The Dow Jones Industrial Average rose 0.64 per cent, the S&P 500 gained 0.69 per cent and the Nasdaq added 0.76 per cent.

Higher interest rates have caused a sell-off in government bonds. The yield on benchmark 10-year Treasury notes remained high at 3.4846 per cent, after hitting 3.518 per cent on Monday, its highest level since April 2011.

The two-year yield, a barometer of future inflation expectations, touched 3.9528 per cent after climbing to a fresh almost 15-year high of 3.970 per cent.

It is not just in the US that interest rate rises are expected. Most of the central banks meeting this week - from Switzerland to South Africa - are expected to hike, with markets split on whether the Bank of England will move by 50 or 75 basis points.

China's central bank went its own way though, cutting on Monday a repo rate by 10 basis points to support its ailing economy.

The other exception is the Bank of Japan, also due to meet this week and which has shown no sign of abandoning its ultra-easy yield curve policy despite a drastic slide in the yen.

Dollar firms up

The higher yields helped strengthen the dollar and made gold less attractive.

The dollar index, which measures the currency against six counterparts, was 0.0373 per cent stronger at 109.58.

Gold was slightly lower. Spot gold was traded at $1,675.63 per ounce.

Oil prices also dropped, pressured by the stronger dollar, and the subdued outlook for global economic growth. US crude dipped 0.17 per cent to $85.58 a barrel. Brent crude fell to $91.9 per barrel.

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