Asian stocks struggled on Friday to follow Wall Street's euphoria about a possible US rate cut next month as anxiety over Sino-US trade negotiations clouded investor sentiment in the region.

Also tempering appetite in Asia were fresh worries about West Asia, after Iran shot down a US military drone, raising fears of a military confrontation between Tehran and Washington and pushing the crude oil price higher.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 per cent. The index was up about 4 per cent on the week, during which it brushed its highest level since May 8. The Shanghai Composite Index rose 0.4 per cent, Australian stocks declined 0.3 per cent and Japan's Nikkei shed 0.2 per cent amid the yen's big surge.

The S&P 500 hit a record high on Thursday after this week's Federal Reserve meeting boosted expectations that the central bank will cut interest rates as soon as next month to keep the US-China trade war from stalling economic growth.

The Fed signalled easing after the conclusion of its policy setting meeting on Wednesday, saying it was ready to battle growing global and domestic economic risks.

“There is no doubt that this week's FOMC meeting outcome is positive for the financial markets including those in Asia,” said Kota Hirayama, senior emerging market economist at SMBC Nikko Securities in Tokyo. “That said, the FOMC alone won't be able to sustain Asian equities indefinitely until some kind of solution can be worked out for the US-China trade war at the G20, since the region is particularly vulnerable to the conflict.”

Investors have pinned hopes on the United States and China reaching some sort of compromise at the sidelines of the G20 summit in Japan on June 28-29.

Dollar on the defensive

In currency markets, the prospect of US interest rates being lowered put the dollar squarely on the defensive. The dollar index against a basket of six major currencies fell to a two-week low of 96.495. The index has shed roughly 1 per cent this week. The greenback has fallen 1.3 per cent versus the yen this week and slid to a six-month low of 107.12 yen on Friday.

The euro was a touch higher at $1.1302 after popping up to an eight-day high of $1.1317 in the previous session. The single currency was headed for a weekly gain of 0.8 per cent.

With the Fed expected to ease policy soon, and with other central banks such as the European Central Bank and the Bank of Japan seen following in their wake, government bonds were on a bullish footing.

The benchmark 10-year US Treasury yield surged in price and its yield fell below 2 per cent for the first time in two and a half years on Thursday. It last stood at 2.007 per cent. The German 10-year bund yield touched a record low of minus 0.329 per cent this week while Japan's 10-year yield fell to a near three-year trough of minus 0.185 per cent overnight.

“In euroland and Japan, central banks are pedal-to-the-metal to revive dead economies after a dozen years of subpar growth,” wrote Carl Weinberg, chief international economist at High Frequency Economics. “In North America, the game has been to throttle well-performing economies before they overheat with inflation consequences.”

Oil up

In oil markets, crude rose to three-week highs after Iran shot down a US military drone, raising fears of about fresh conflict in West Asia and supply constraints. US crude oil futures were up 0.68 per cent at $57.46 per barrel after rallying more than 5 per cent the previous day.

Spot gold advanced to a six-year high of $1,410.78 an ounce as the prospect of lower US interest rates helped boost the non-yielding precious metal. Gold has soared nearly 5 per cent this week.

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