By Hideyuki Sano
TOKYO (Reuters) - Asian shares struggled to find a solid footing on Thursday as escalating tensions in Ukraine sent investors scurrying to the safety of the dollar and U.S. Treasuries.
Japanese stocks skidded, with the Nikkei slipping 0.4 percent although MSCI's broadest index of Asia-Pacific shares outside Japan managed to erase early losses to eke out small gains on a rebound in Chinese shares.
European shares are expected to fall slightly, with Germany's DAX and Britain's FTSE seen falling about 0.1 percent.
Wall Street's failure to extend its rally above historical highs on Wednesday did not help soothe fears that a wider conflagration in Ukraine could intensify risk aversion.
Russian President Vladimir Putin ordered drills by his armed forces to test combat readiness in western Russia, near the border with Ukraine, prompting Washington to warn a military intervention would be a "grave mistake."
"Clearly it's all very sensitive at the moment," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
"I think that's probably what could provoke a bigger impact, because obviously you could end up seeing a big escalation of tensions between Russia and the West," he added.
The Russian rouble tumbled to a five-year low against the dollar and stayed near an all time-low against the euro hit on Wednesday.
The Ukrainian hryvnia hit record lows on Wednesday after Ukraine's central bank said it was abandoning a managed exchange rate policy.
Safe-haven U.S. Treasuries benefited from the sombre mood in markets, with the 10-year U.S debt yield falling to a three-week low of 2.662 percent, despite surprise strength in U.S. new home sales data.
Investors are now looking to comments from Fed chief Janet Yellen's testimony at a U.S. Senate committee on Thursday on her views on a recent run of soft U.S. data, which investors chalk up to bad weather, rather than weakening in the fundamentals.
If that is the case, investors are likely to expect the Fed to keep trimming its bond purchase by $10 billion at each policy meeting to end it completely by the end of this year.
The dollar also strengthened broadly, with the dollar index hitting its highest level in about two weeks.
"Given U.S. debt yields fell and that U.S. shares were steady to softer, the dollar's strength should be regarded as a reflection of risk aversion rather than rising confidence in the U.S. economy," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy.
The euro traded at $1.3681, after having fallen 0.4 percent to two-week lows on Wednesday. Against the yen, which also tends to rise when markets are under stress, the dollar was little changed at 102.37 yen.
The Chinese yuan remained pressured near a seven-month low hit on Wednesday, trading below the daily fixing set by Beijing for a third consecutive day.
The yuan stood at 6.1300 per dollar, near Wednesday's low of 6.1351 and below the fixing at 6.1224.
Traders suspect the People's Bank of China (PBOC) is possibly aiming to inject more two-way volatility into the market and prepare it for more reforms.
"It's possible that the Chinese authorities think they need a weaker yuan now to bolster the economy," said Hirokazu Yuihama, senior strategist at Daiwa Securities.
Hong Kong shares rose, led by state oil giant Sinopec but the CSI300 of the biggest Shanghai and Shenzhen A-share listings, under pressure from concerns over slowdown as well as fear of lending curbs on property developers, slipped to near an eight-month low set on Wednesday.
Most other Asian currencies held steady for now but the tense backdrop could put renewed pressure on emerging market currencies and shares. They were battered earlier this year by concerns about slower global growth and the tapering of the U.S. Federal Reserve's monetary stimulus.
Turkey, one of the hardest-hit countries, saw its lira slipping to three-week lows, dented also by a corruption scandal embroiling Prime Minister Tayyip Erdogan's government.
Brazil's central bank raised its benchmark interest rate on Wednesday to 10.75 percent from 10.50 percent as expected, slowing the pace of monetary tightening to avoid hurting an economy that is flirting with recession.
Copper dropped to a three-month low below $7,000 a tonne, extending its losses over the past week on concerns about slower growth in China.
Gold also stepped back after hitting a four-month high on Wednesday as the dollar strengthened broadly. It last stood at $1,325.90 an ounce, off Wednesday's high of $1,345.35.