By Saikat Chatterjee
HONG KONG (Reuters) - Asian stocks broke a four-day winning streak on Wednesday while safe-haven bets such as gold consolidated overnight gains as U.S. lawmakers' growing support for military action against Syria sapped investor demand for riskier assets.
European markets are set to follow Asia's lead with financial spreadbetters expecting Britain's FTSE 100 to open flat, Germany's DAX to open up by 0.1 percent, and France's CAC 40 to open up by 0.2 percent.
The U.S. dollar stood tall as risk appetite ebbed, on course for its best five-day performance in two months against a basket of currencies as stronger-than-expected U.S. data emboldened dollar bulls.
MSCI's broadest index of Asia-Pacific shares outside Japan rose from the day's lows but remained slightly in the red after four days of gains.
Japan's Nikkei recouped early losses and rose to a fresh three-week high. . The benchmark Nikkei .N225 ended up 0.5 percent at 14,053.87, its highest closing since August 14. The index has surged 35 percent this year, but is 12 percent below its May peak.
Selling of utility Tokyo Electric Power Co saw the highest volumes on the board after the company detected the highest radiation levels found so far near tanks holding contaminated water at Fukushima.
Risk appetite was noticeably weaker after key congressional leaders John Boehner and Eric Cantor supported military action to punish President Bashar al-Assad's suspected use of chemical weapons on civilians.
Their stance suggested that the vote could pass in Congress when lawmakers return to Washington on September 9, CitiFX wrote in a client note.
The increased sense of urgency pushed down benchmark 10-year U.S. treasury yields to 2.86 percent from overnight highs, despite a U.S. manufacturing index beating forecasts and setting a stronger tone for Friday's non-farm payrolls -- which would in turn back expectations the Federal Reserve will start trimming bond-buying this month.
Still, 10-year U.S. yields are eight basis points above yesterday's close and nearly 90 basis points higher since Fed Chairman Ben Bernanke's said in June that the central bank might soon start to scale back its quantitative easing drive.
Rising U.S. yields have hit demand for emerging market plays such as high-yielding currencies in Asia and have sent debt yields there spiralling up as global investors drew capital back to Western markets.
A JP Morgan index of emerging market debt in Asia hit a composite redemption yield of 4 percent for the first time since November 2009, according to Thomson Reuters Datastream.
India and Indonesia have been singled out by investors for punishment due to their reliance on capital inflows to paper over widening deficits.
In stark contrast to these two beleaguered economies, the Korean won punched above a 200-day moving average, a key technical level, against the U.S. dollar and rose above 1100 for the first time since early May.
While net equity flows are still negative on a year-to-date basis at $5.1 billion, they are a substantial improvement from a July outflow of nearly $9 billion, according to Brown Brothers Harriman strategists.
"India and Indonesia continue to be the weak spots in Asia while Thailand and Malaysia are also looking vulnerable," said Cynthia Wong, head of emerging markets trading, Hong Kong and Singapore, at Societe Generale in Hong Kong. "Investors continue to focus towards the relatively stronger economies of North Asia rather than the rest of the region".
SHINING AUSSIE, DOLLAR
In the currency market, the dollar was a big winner in the wake of the upbeat U.S. data, rising to a six-week peak against a basket of major currencies.
That dollar strength saw the euro slide to a six-week low of $1.3138, although it has since managed to edge up to $1.3170. Both the dollar and euro clung to modest gains on the yen, but could quickly lose them if geopolitical risk flared up.
Oil and gold rose on the news with U.S. crude at $108.29 a barrel, having jumped nearly 1 percent on Tuesday. Spot gold traded at $1,412.95 an ounce following a 1.3 percent rally overnight as investors sought safety.
The Asahi newspaper reported that the Bank of Japan will consider further monetary easing if Prime Minister Shinzo Abe decides to raise the sales tax as planned to 8 percent from 5 percent in April, which worked against the yen for now.
The Australian dollar was boosted by data showing the economy grew 0.6 percent in the second quarter. While that growth was still below trend, some speculators had wagered on a much weaker outcome and were caught short.
The Aussie built on Tuesday's gains after the Reserve Bank of Australia (RBA) gave no clear hint that it would cut its cash rate soon, following a widely expected decision to leave it at a record low 2.5 percent.
On Thursday, policy decisions from major central banks including the Bank of Japan and European Central Bank will take centre stage. Neither the BOJ nor the ECB is expected to inject fresh stimulus.