Asian shares recouped early losses over-night but prices were capped as investors settled in to wait for the US Federal Reserve meeting outcome later in the week - and some long-awaited clarity on its intentions for monetary stimulus.

Uncertainty over the Fed’s future policy course has triggered a sharp sell-off in broad risk assets over the past few weeks, offering dip buying levels for some Asian equities. Wall Street fell on Friday for its third negative week in four as investors took profits from recent gains, while data showed the US economic recovery was still not strong enough to warrant an imminent change in the Fed’s current position.

“Market players both domestic and overseas are taking a wait-and-see stance,” said Kim Young-il, a market analyst at Daishin Securities, of South Korean shares which traded nearly flat but hovered near a seven-month low hit last week. “The market at its current level, however, has limited room for further downward moves. Valuations are cheap,” Kim added.

MSCI's broadest index of Asia-Pacific shares outside Japan erased earlier losses to rise 0.5 per cent. It advanced 1.6 per cent on Friday for its best daily gain since January 2nd, but ended the week down 1.3 per cent after tumbling to its lowest since September on Thursday. Australian shares regained positive territory to rise 0.4 per cent from a 1 per cent drop earlier in the session. They posted their biggest one-day rise in 18 months on Friday.

Still, investors remained wary ahead of the Fed policy meeting over Tuesday and Wednesday, where the central bank may conceivably taper its massive bond-buying programme as long as the economy is showing some improvement. Data on Friday showed May industrial output was unchanged, below a 0.2 per cent forecast rise, while Thomson Reuters and University of Michigan’s index of US consumer sentiment unexpectedly fell from a near six-year high in early June.

The US economy may not be picking up much steam but it was also not facing deflationary pressure, with the producer price index up 0.5 per cent last month, above a 0.1 per cent gain forecast. “Although no change in policy settings is expected, the ability of Fed Chairman Bernanke to communicate effectively the Fed’s strategy over ‘tapering’ will be crucial to determine whether market volatility persists or lessens,” analysts at Credit Agricole CIB said in a research note. The dollar was top-heavy against a basket of six major currencies, trading up 0.06 per cent but staying near a four-month low of 80.50 hit on Thursday. Goldman Sachs said in a research report that despite moderate growth in the United States relative to the rest of the world, the latest TIC data released last week indicated a lack of any notable capital inflows, which, along with the persistent trade deficit, remains negative for the dollar. The dollar recovered against the yen, however, rising 0.5 per cent to 94.57 and helping improve sentiment for Japan’s benchmark

Nikkei stock average, which rose 1.2 per cent after opening lower. The dollar hit a 10-week low of 93.75 yen on Thursday, bringing it down nearly 10 per cent from last month's 4-1/2-year peak of 103.74 yen. The dollar ended last week down 3.4 per cent for its biggest weekly loss since July 2009. The dollar's loss against the yen has also been linked to speculators and investors cutting back their yen short positions after the Bank of Japan took no action to quell a highly volatile domestic bond market last week, sparking a sell-off in the Nikkei and erasing gains made since the central bank's big-bang stimulus unveiled on April 4, which had helped propel the index up to a 5-1/2-year high last month.

“The reaction to the BOJ’s no-action brought the dollar/yen and Nikkei back to levels before the bazooka stimulus in April, leaving markets wondering whether the BOJ’s 2 per cent inflation target is achievable without a weak yen,” said an official at a Japanese institutional investor.

On the interest rate front, India’s central bank will announce its rate decision later in the session, coming after central banks in the Philippines and South Korea held rates steady last week amid the spike in global risk aversion.

US crude futures fell 0.3 per cent at $97.53 a barrel and Brent eased 0.2 per cent to $105.76. London copper rose 0.9 per cent to $7,151 a tonne on short covering following its steepest weekly decline in two months last week, ahead of the Fed meeting.

Reuters