The dollar was mostly lower in Asia on Tuesday, taking its cue from a broad move lower in regional equities and caution ahead of the US Federal Reserve’s two-day meeting that begins later in the session.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.7 per cent, as China’s key share indexes gave up more than 1 per cent.

Adding to the risk-off mood, the US Navy sent a destroyer within 12 nautical miles of artificial islands built by China in the South China Sea, in a challenge to Beijing’s territorial claims there.

“It looks like a traditional risk-off move, with Asian stock markets down,’’ said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong, who added that safe-haven currencies like the yen were outperforming the risk-proxy currencies like the Australian dollar.

“The Aussie in particular is underperforming, so the US dollar is stronger against the Aussie.’’

Frequently used as a China play because of Australia's significant trade with that country, the Aussie slipped about 0.1 per cent to $0.7235, and also shed about 0.6 per cent on the ¥87.23.

US home sales data

The greenback began the Asian session already on the back foot, after disappointing US home sales data pushed down Treasury yields and prompted investors to pare bets that the Fed would opt to hike interest rates before year-end.

Data released on Monday showed new US single-family home sales fell to near a one-year low in September after gaining for two straight months.

The disappointing figures backed expectations that the US central bank will leave rates near zero on Wednesday, at the close of a two-day meeting beginning later in the session.

“The arguments for a 2015 rate hike are fading,’’ Kathy Lien, managing director of BK Asset Management, wrote in a note to clients.

“More specifically, while we are long-term dollar bulls, the ‘trader’ in us sees a greater chance of dollar weakness going into and after this week’s FOMC meeting,’’ she said.

Against its Japanese counterpart, the dollar gave up about 0.4 per cent to 120.58 yen, moving away from a 2-month high of 121.60 yen touched on Monday ahead of a Bank of Japan meeting on Friday.

BOJ monetary stimulus

While Japan’s central bank is set to cut its price forecasts in a semi-annual report also due out on Friday, many BOJ officials would prefer to hold off on expanding the bank’s massive stimulus programme.

Divergent monetary policy expectations underpinned the greenback against the euro, which was buying $1.1064, up about 0.1 per cent from late US trading. Investors expect the European Central Bank to eventually expand or extend its asset purchase programme to support the euro zone economy.

The dollar index, which tracks the US unit against a basket of six rival currencies, was down about 0.2 per cent at 96.691.

The yield on benchmark 10-year Treasuries notes stood at 2.040 per cent in Asian trading, down from its US close of 2.058 percent. The yield scaled a two-week peak of 2.099 per cent on Friday.

The futures market implied traders see only a 7 per cent chance of a rate hike on Wednesday and a 34 per cent probability of a rate increase at its next meeting in December, according to the CME FedWatch program.

Fed officials have been sending mixed messages to markets in recent weeks. Analysts say that Federal Reserve Chair Janet Yellen needs to adopt a stronger tone after this week’s policy meeting if she expects to convince markets that a December interest rate rise is still a real possibility.

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