Asian shares eased and the dollar firmed on Tuesday as investors consolidated positions ahead of the U.S. Federal Reserve's two-day policy meeting at which it is expected to begin withdrawing stimulus.
While the Fed on Wednesday is expected to decide by how much it is trimming its massive bond purchases, markets anticipate a much longer road to rate hikes after former Treasury Secretary Lawrence Summers dropped out of the race to become the next Fed chief.
Despite a lacklustre August jobs report, the U.S. central bank is expected to reduce its monthly asset purchases by about $10 billion from $85 billion.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 percent, with Japan's Nikkei stock average rose 0.1 percent as Japanese markets caught up after a public holiday on Monday.
"Summers' withdrawal is positive for equity markets as it supports expectations that the pace of tapering will be more gradual," said Kenichi Hirano, a strategist at Tachibana Securities.
"The Nikkei is likely to stay subdued as investors will refrain from taking positions until the Fed meeting is over."
Even as some investors brace for a cut in quantitative easing, which has provided crucial support for global markets, CitiFX Head G10 Strategist Steven Englander expects the tapering announcement combined with dovish language will be anti-climactic and possibly generate some backing up of yields and some support for the U.S. dollar.
Underpinning investors' risk tolerance was easing tension in Syria after Russia and the U.S. reached a deal to remove Syrian President Bashar al Assad's chemical arsenal.
Investors switched out of better-performing markets in North Asia to hunt for bargains elsewhere as stock markets in Korea and China led regional declines even as India and Indonesia seem to have found their feet after a recent beating.
China's two main indexes were down nearly 1 percent.
HUNGRY FOR YIELD
The dollar index, which measures it against six major currencies, stood at 81.31, after having fallen to 80.968, its lowest since Aug. 21, on Monday.
Latest UBS data on flows suggests that investors were reaching out for currencies from countries most likely to have rate hikes, such as the New Zealand dollar. That country's central bank signalled a hike in the second quarter of 2014.
The Australian dollar briefly shot higher after the Reserve Bank of Australia's minutes of its Sept. 3 meeting signalled that a rate cut wasn't imminent, but then it slipped to be flat for the day.
Even as the U.S. dollar came under pressure after recent disappointing data, investors will be parsing the Fed's statement after this week's meeting for guidance on its future stance.
"On top of the size of tapering, what's more important this time is the Fed's forecast of interest rates in 2016, which will give markets an idea on the pace of future rate hikes," said Sho Aoyama, senior market analyst at Mizuho Securities.
Analysts say rate hike expectations hold the key because of their impact on short-term U.S. bond yields and thus the dollar's yield attraction.
On the commodities front, three-month copper on the London Metal Exchange fell 0.03 percent to $7,083 a tonne. It dropped to a five-week low of $7,024 a tonne on Friday, as investor appetite for risk improved on expectations of a diplomatic solution to the Syria crisis and the dollar fell.
Gold was down slightly at $1,313.46 an ounce.
Brent crude for delivery in November fell by 0.4 percent to $109.65 a barrel, moving further away from the six-month high of $117.34 a barrel in late August on worries about a possible U.S. military strike against Syria.