Tokyo - Asian shares edged higher while the euro steadied on Tuesday, but prices were capped as investors waited for the US Federal Reserve's policy decision later this week and any progress in US budget talks.
MSCI's broadest index of Asia-Pacific shares outside Japan nudged up 0.2%. The index has hit successive 16-month highs for the past four sessions.
Australian shares gained 0.4% to their highest in nearly two months on a strong resources sector, which was supported by a rise in metals and oil prices and hopes for the Fed to further ease monetary policy.
Hong Kong shares rose 0.4% to a 16-month high but Shanghai shares fell 0.5%.
"The market continues to trade sideways in an environment where headlines seem to have lost bite. Poor liquidity conditions as we approach the end of the year seem to keep portfolios on a tight leash around their benchmarks," said Barclays Capital analysts in a research note.
Japan's Nikkei share average was the region's other laggard, slipping 0.3% to around 9,506 as investors became cautious over signs that the market is overbought after a 10% rally in the past month and took profit on export-focused firms.
"The 9,500-level is still an important psychological line for both support and resistance purposes," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
US Treasury prices edged higher on Monday on worries about US budget wrangling, Italy's political rumbling and expectations of further monetary easing by the Fed.
At the end of the two-day meeting which begins on Tuesday, the Fed is expected to announce it will buy $45bn per month of longer-dated Treasuries beginning in January to replace the current Operation Twist programme, which expires at the end of December.
Under the programme, it sells shorter-dated US government debt and buys longer-dated Treasuries to extend the duration of its balance sheet.
Such views weighed on the dollar and helped to underpin the euro, which traded at $1.2937, off Monday's low of $1.2880.
The dollar firmed 0.1% to ¥82.40 as the yen has also been pressured by expectations for more easing from the Bank of Japan, which meets next week.
The euro was also supported as Italian Prime Minister Mario Monti played down market fears over his decision to resign, saying there was no danger of a vacuum ahead of an election in the spring.
"I think people at this point are not sure whether there really will be the risk of Italy not pursuing its fiscal reforms pursued under Monti. So it's hard to really price that news in yet," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
European partners urged the next Italian government on Monday to stick to Monti's reform agenda, after his decision to resign early and Silvio Berlusconi's return to frontline politics rattled financial markets.
Monti had earned market confidence over the past year in indebted Italy, as he spearheaded a reform agenda to rescue the eurozone's third-largest economy from the threat of a Greek-style collapse.
His earlier-than-expected departure raised concerns about the prospects for Italy's fiscal reforms, lifting Italy's benchmark 10-year bond yield up to 4.83%, the highest in more than three weeks, while driving Italian shares down more than 2%.
Investors also worry about the impact on neighbouring Spain, which is struggling with high debt and studying the need for outside help.
Fiscal worries in the United States have also weighed on investor sentiment, limiting their activity as trading winds down towards the year-end holiday season.
Economists have warned that a failure by Congress to avert the "fiscal cliff," some $600bn of tax hikes and spending cuts scheduled to start in January, could send the US economy back into recession, further weighing on the fragile global economy.
The White House and House of Representatives Speaker John Boehner's office held more negotiations on Monday on ways to break the budget stalemate, but neither side showed any public signs that they were ready to give ground. The talks picked up pace after Boehner met with President Barack Obama on Sunday, raising hopes of progress.
US crude futures were little changed at $85.56 a barrel and Brent eased 0.1% to $107.28.
Trading was subdued in Asian credit markets, with the slight rise in stocks helping to narrow the spreads on the iTraxx Asia ex-Japan investment-grade index marginally by 1 basis point.
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