Singapore: Asian stocks edged up after an early fall while the dollar kept a tenuous grip on overnight gains in Asia yesterday ahead of US elections and a Federal Reserve meeting that was expected to ease monetary policy.

European markets opened weaker after rising for three consecutive sessions.

The Australian dollar leapt after Australia's central bank surprised markets and raised interest rates as a pre-emptive strike against inflation.

The MSCI index of Asia Pacific stocks outside of Japan recovered after early falls to rise 0.4 per cent on gains in energy and materials, and Hong Kong's Hang Seng Index was also up after Chinese banks extended gains.

Japan's Nikkei share average closed up 0.1 per cent after touching a seven-week low, though the broader-based Topix index shed 0.02 per cent to a 19-month closing low, under pressure from the yen's strength as it hovered near a record high against the dollar.

The currencies are down 13 per cent and 12 per cent so far this year, respectively.

Analysts said the Topix had been hit hard by a downbeat performance in the banking sector, on worries about stricter global banking regulations, and by a series of equity financings. "The market is of course cautious until it sees the outcome of the Fed meeting and the US election, but Japanese stocks are being pressured more by selling from real money investors," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

"Japanese banking shares are also pressured by Basel, as they are part of the global banking sector. With uncertainty over the outlook for European banking shares remaining, it may be inevitable that those shares are taken out of portfolios."

Under new global banking regulations proposed last month, known as "Basel III", banks will be required to hold top-quality capital worth at least seven per cent of their risk-bearing assets — more than three times current requirements.

Monetary easing

The dollar gave up some overnight gains in ranges that tightened ahead of the Fed's policy meeting where it was expected it would announce a second round of monetary easing.

Markets generally have priced in for the central bank to commit to buying at least $500 billion in Treasury debt over coming months to spur a flagging economy.

The Fed was also expected to announce a programme of large-scale asset purchases, and announce the outcome today.

The dollar edged up to 80.56 yen though it remained within sight of a record low of 79.75 yen set in 1995.

Markets were keeping an eye on the pair, with the risk of Japanese intervention seen mounting if the dollar slipped below 80 yen.

"The market is turning cautious ahead of the Fed's meeting. As the market position has been overwhelmingly short in the dollar, the psychology at work here is that you should unwind your position," said a trader at a Japanese bank.

The Australian dollar surged 1.1 per cent on the day after the central bank raised interest rates by 25 basis points to 4.75 per cent. Most investors had expected the Reserve Bank of Australia to hold rates at 4.5 per cent.

The Australian dollar rallied as far as $0.9981, from $0.9885 before the rate decision was announced.

India's central bank raised interest rates for the sixth time this year to tame inflation, and indicated the increase was likely to be its last in the near term.

The Reserve Bank of India (RBI) raised its lending and borrowing rates by 25 basis points each, as expected by most analysts.

Gold was up $5.1 to $1,355.35 by 0504 GMT, after hitting a two-week high at $1,365.49 in Asia on Monday. Gold struck a record around $1,387 last month.