Asian stocks erased earlier gains and the Japanese yen rallied to a fresh eighteen-month high on Tuesday as investors grew doubtful about global central banks’ ability to boost growth through aggressive policy easing.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after being up as much as 0.4 per cent on the day and is now trading at a three-week low.

Australian shares were the notable exception, shooting 2 per cent higher after an unexpected easing by the central bank, which also knocked the local currency more than 1 per cent lower.

Financial spreadbetters expect stock markets in Britain, Germany and France to open broadly steady to slightly higher on Tuesday.

“Markets are telling us is that the European Central Bank and the Bank of Japan are failing in their mission to expand monetary stimulus and that these policies are not doing what they are expected to do,” said Cliff Tan, east Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd.

“That is discouraging for equities.’’

The BOJ had stunned markets last week by keeping the monetary policy unchanged in the face of growing headwinds for its economy, while the ECB has recently struck a more guarded stance on the question of adding more stimulus.

RBA rate cut

Australia’s central bank on Tuesday joined a growing line of central banks in adding more stimulus, cutting its cash rate to a record low of 1.75 per cent to head off deflationary risks. The majority of economists surveyed by Reuters had expected no change at the meeting.

Australia’s stock markets cheered the surprise rate cut with the benchmark index easily the outperformer in Asia and extending gains to be up more than 2 per cent on the day.

The Australian dollar dropped sharply after the surprise rate cut with the currency falling below the 0.76 handle against the greenback from 0.77 earlier.

China factory data

Stock markets in Hong Kong and Taiwan were the region’s biggest losers after a survey showed activity at China’s factories shrinking for the 14th straight month in April as demand stagnated.

While a firm finish in US stocks, thanks to a rebound in financials led by Berkshire Hathaway, offered some hope to Asian investors, the sharp gains in the Japanese yen against the dollar deflated optimism.

The dollar set a fresh 18-month low versus the yen on Tuesday, as the yen pushed higher in a holiday-thinned market with one Singapore-based trader saying there appeared to some speculative yen buying.

Japan is in the middle of its Golden Week series of holidays. Markets were closed on Friday and will be closed on Tuesday to Thursday this week.

Dollar slumps

The dollar was trading at the day’s lows, down 0.5 per cent to 105.9 yen, its lowest level since October 2014.

The yen added to its recent gains, having jumped about 5 per cent against the dollar last week as the BOJ held off from expanding its monetary stimulus — the yen’s biggest weekly gain since 2008.

The US Treasury put Japan on a new currency monitoring list with four other countries that have large trade surpluses with the United States, seen making it harder for Tokyo to intervene in the markets to stem the yen's gains.

The dollar index, which measures the dollar’s performance against a trade-weighted basket of its peers, is trading at its lowest since January 2015.

Fed rate hike

After raising interest rates in December for the first time in nearly a decade, the Federal Reserve held monetary policy steady last week. While it kept the door open for a hike in June, it gave no signal that it was in a hurry to tighten further given the economy's slowdown, even as the labour market has improved.

Crude oil

Oil futures rose to $45.07 a barrel in Asian trading, slightly below the 2016 high of $46.78 hit on Friday and 80 per cent above February's low.

Spot gold briefly rose above $1,300 an ounce in the previous session, its highest since January 2015, before edging lower on Tuesday.

US ten year yields were steady around 1.88 per cent.

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