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Dollar regains footing after U.S. government shutdown, higher yields support

The dollar regained some footing on Monday after slipping earlier on a U.S. government shutdown, supported by higher Treasury yields, while investors took a relatively calm view of the Washington wrangling.

The U.S. government shutdown took effect at midnight on Friday after Democrats and Republicans, locked in a bitter dispute over immigration and border security, failed to agree on a last-minute deal to fund government operations.

In order to break the impasse, Republican and Democratic leaders of the U.S. Senate held talks on Sunday. Senate Majority Leader Mitch McConnell said late on Sunday that an overnight vote on a measure to fund government operations through Feb. 8 was canceled and would instead be held at 12 p.m. (1700 GMT) on Monday. [nL2N1PH04D]

"The market is accustomed with what is taking place in U.S. politics. It is not reading too far into the shutdown, which is more like a political show," said Koji Fukaya, president of FPG Securities in Tokyo.

The dollar's index against a basket of six other major currencies initially dipped to hit 90.155 but was last up 0.1 percent at 90.665, managing to hold above the three-year trough of 90.113 set on Thursday.

The euro was a shade lower at $1.2221 after climbing to $1.2275 but failing to regain the three-year peak of $1.2323 that it scaled on Wednesday.

"The dollar's losses have been limited as negotiations going into Friday were proving difficult and the market had time to price in a U.S. government shutdown," said Shin Kadota, senior strategist at Barclays (LON:BARC) in Tokyo.

"The shutdown is also not expected to last a very long time. That said, if the shutdown stretches out to several weeks, then we would have to start worrying about the negative impact on the U.S. economy."

The dollar pared its earlier losses and was little changed at 110.860 yen , still some distance from a four-month low of 110.190 plumbed on Wednesday.

The greenback received some support from higher U.S. yields.

The 10-year Treasury yield extended Friday's rise and touched a 3-1/2-year high of 2.672 percent. The debt market had been on the defensive through much of last week in the wake of a rally in risk asset markets.

"A reverse correlation has been in place for a while between Treasury yields and the dollar, but there are signs that the disconnect between the two is finally beginning to reverse," Fukaya at FPG Securities said.

The Australian dollar was little changed at $0.7989 and the New Zealand dollar was steady at $0.7277 .

The pound dipped 0.3 percent to $1.3862 , pulling away from a 1-1/2-year top of $1.3942 reached on Wednesday following Friday's disappointing UK retail sales data.

Before Friday's fall sterling had gained against the dollar for seven straight sessions, with traders welcoming positive noises from the European Union about Brexit negotiations.

Dollar hurt by U.S. shutdown fears, Treasury yields at highest since 2014

The dollar wallowed near three-year lows on Friday as heightened fears of a U.S. government shutdown unnerved investors, while U.S. Treasury yields continued an upward march to hit their highest levels since September 2014.

Legislation to stave off an imminent federal government shutdown encountered obstacles in the Senate late on Thursday, despite the passage of a month-long funding bill by the House of Representatives hours earlier.

Without the injection of new money, no matter how temporary, scores of federal agencies will be forced to shut starting at midnight on Friday, when existing funds expire.

The dollar index, which measures the greenback's value against other major currencies, was down 0.3 percent at 90.230 (DXY) and close to three-year lows hit this week.

It has already lost 2 percent in the early days of 2018.

"The fear of the U.S. government shutdown has made investors nervous," said Naeem Aslam, chief market analyst at Think Markets UK. "There is a strong possibility that the U.S. government shutdown may become a reality."

Market players said worries of a shutdown may have also weighed on sentiment in bond markets, which remain under pressure from expectations that strong economic data globally will encourage the U.S. Federal Reserve to press ahead with monetary tightening.

U.S. 10-year Treasury yields hit their highest level in more than three years at 2.642 percent (US10YT=RR) on Friday, and were set for their biggest weekly rise in a month.

"It's a continuation of the trend and expectations for a normalization of monetary policy," said Chris Scicluna, head of economic research at Daiwa Capital Markets, referring to rising U.S. bond yields.


In Europe, equity markets (STOXX) opened firmer with the exception of London's blue-chip FTSE stock index (FTSE). Germany's Dax index was 0.5 percent higher on the day (DAX) and France's benchmark index was up 0.1 percent (FCHI).

The MSCI world equity index (MIWD00000PUS), which tracks shares in 47 countries, touched fresh record highs bouyed by gains in Asia.

Optimism over the global economic growth outlook and improved corporate earnings have helped share markets rally at the start of 2018. Supporting economic confidence was data on Thursday that showed China's growth in 2017 accelerated for the first time in seven years.

China stocks ended at fresh two-year highs on Friday, with the Shanghai index (SSEC) posting its fifth straight week of gains. Japan's Nikkei (N225) closed up 0.2 percent.


The euro rose 0.4 percent to $1.2280 after hitting a three-year peak above $1.2300 earlier this week on expectations that the European Central Bank would take steps towards winding back on stimulus measures to normalize monetary policy.

The euro's rally was tempered later as some ECB officials voiced worries about the currency's strength.

China's yuan meanwhile breached the psychologically important 6.4 dollar level for the first time in more than two years the day after Beijing said annual growth was 6.8 percent in October-December, slightly above forecasts.

Oil prices meanwhile fell more than 1 percent as a bounce-back in U.S. production outweighed ongoing declines in crude inventories.

Brent crude futures (LCOc1) were at $68.63 a barrel, down 1.03 percent on the day. On Monday, they hit their highest since December 2014 at $70.37.

U.S. West Texas Intermediate (WTI) crude futures (CLc1) were also 1 percent lower, trading at $63.28 a barrel.

Gold prices rose, supported by a weaker dollar amid worries about a possible U.S. government shutdown, but the metal was still on track for its first weekly drop in six weeks.

Oil prices fall as U.S. output rise outweighs crude stock falls

Oil prices slid on Friday, putting them on course for the biggest weekly falls since October, as a bounce-back in U.S. production outweighed ongoing declines in crude inventories.

Brent crude futures (LCOc1) were at $68.70 a barrel at 0949 GMT, down 61 cents from their last close. On Monday, they hit their highest since December 2014 at $70.37.

U.S. West Texas Intermediate (WTI) crude futures (CLc1) were at $63.38 a barrel, down 57 cents from their last settlement. WTI marked a December-2014 peak of $64.89 a barrel on Tuesday.

The International Energy Agency (IEA), in its monthly report, said that global oil stocks have tightened substantially, aided by OPEC cuts, demand growth and Venezuelan production hitting near 30-year lows.

But it warned that rapidly increasing production in the United States could threaten market balancing.

"Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico," the IEA said of 2018 production.

U.S. crude oil production stood at 9.75 million barrels per day (bpd) on Jan. 12, data from the Energy Information Administration showed. The IEA said it expects this to soon exceed 10 million bpd, overtaking OPEC behemoth Saudi Arabia and rivaling Russia.

Analysts also pointed to an expected demand slowdown at the end of winter in the northern hemisphere and excessive long positions in financial oil markets as a likely brake on any upward momentum in prices.

ANZ bank said "an upcoming soft patch in demand and extreme investor positioning does open up the possibility of some short-term weakness".

Overall, however, oil prices remain well supported, and most analysts do not expect steep declines.

The main price driver has been a production cut by a group of major oil producers around the Organization of the Petroleum Exporting Countries (OPEC) and Russia, who started to withhold output in January last year.

The supply cuts by OPEC and its allies, which are scheduled to last throughout 2018, were aimed at tightening the market to prop up prices.

In the United States, crude inventories fell 6.9 million barrels in the week to Jan. 12, to 412.65 million barrels.

That's their lowest seasonal level in three years and below the five-year average marker around 420 million barrels.

Stocks - Dow Set for Record High as Investors Look Ahead to Earnings

Wall Street was set to rise on Tuesday as investors looked ahead to earnings and economic data, with the Dow expected to reach over 26,000 for the first time.

The S&P 500 futures rose 12 points or 0.45% to 2,801.25 as of 6:48 AM ET (11:48 GMT) while Dow futures increased 229 points or 0.89% to 26,030.0. Meanwhile tech heavy Nasdaq 100 futures was up 42 points or 0.62% to 6,817.25.

Markets in the U.S. were closed on Monday for the Martin Luther King Day holiday.

A flurry of earnings is expected this week, with Citigroup (NYSE:C), UnitedHealth Group Incorporated (NYSE:UNH), Comerica (NYSE:CMA), and CSX (NASDAQ:CSX) among the major firms releasing their financial results before the morning bell on Tuesday. Shares in Citigroup rose 0.60% in pre-market trading while UnitedHealth surged 3.66%.

Semiconductor Advanced Micro Devices (NASDAQ:AMD) was among the top performers before the morning bell, rising 1.33%. Telecommunications firm Nokia (HE:NOKIA) increased 3.08% after it finalized a deal to manage Australian-based Optus’s telecommunications network infrastructure and operations for five years. Meanwhile Bank of America (NYSE:BAC) inched forward 0.99%.

Elsewhere Overstockcom Inc (NASDAQ:OSTK) slumped 6.90% while photography firm Eastman Kodak Co (NYSE:KODK) was down 9.24% and patent firm Marathon Patent Group Inc (NASDAQ:MARA) decreased 13.67%

In economic news, the Empire State Manufacturing survey is released at 8:30 AM ET (13:30 GMT).

In Europe stocks were mostly up. Germany’s DAX rose 135 points or 1.03% while in France the CAC 40 increased 17 points or 0.31% and in London, the FTSE 100 fell four points or 0.06%. Meanwhile the pan-European Euro Stoxx 50 was up 14 points or 0.40% while Spain’s IBEX 35 gained 67 points or 0.65%.

In commodities, gold futures rose 0.603% to $1,335.30 a troy ounce while crude oilfutures slumped 0.68% to $63.86 a barrel. The U.S. dollar index, which measures the greenback against a basket of six major currencies, rallied 0.38% to 90.47.

Oil gives up early gains, but market still well supported

Oil prices gave up some early gains on Wednesday as analysts warned of a downward correction, but remained well supported on the back of tightening supply and strong global demand

Tighter fundamentals have lifted both crude futures benchmarks about 13 percent above levels in early December, helped by production curbs by OPEC and Russia, as well as by healthy demand growth.

Brent crude futures (LCOc1) were at $69.23 a barrel at 0808 GMT, up 8 cents from their last close, but down from a high of $69.37 earlier in the day. Brent on Monday rose to $70.37 a barrel, its highest since December 2014, the start of a three-year oil price slump.

U.S. West Texas Intermediate (WTI) crude futures (CLc1) were at $63.84 a barrel, down from a high of $63.89 earlier, but up 11 cents from their last settlement. WTI hit $64.89 on Tuesday, also the highest since December 2014.

Norbert Ruecker, head of commodity research at Swiss bank Julius Baer, said a price "correction should occur... (as) hedge fund expectations for further rising prices have reached excessive levels."

He said this was especially the case as political risk factors that have helped boost Brent, including tensions in Qatar, and the Kurdish region of Iraq and in Iran have so far not caused significant supply disruptions.

Money managers have raised the bullish positions in WTI and Brent crude futures and options to a record, according to data from the U.S. Commodity Futures Trading Commission and the Intercontinental Exchange.

BMI Research said "seasonally high refining run rates" from the northern hemisphere winter season "are set to fall substantially" as the end of winter approaches.

Brent spot crude futures contracts have already moved out of winter, now trading for March delivery.

"This will act as a substantial drag on global crude demand in Q1 and feeds into our bearish short-term outlook on Brent," BMI said.

Still, traders and analysts said overall oil markets were well supported, and steep price falls unlikely.

The Organization of the Petroleum Exporting Countries (OPEC) and Russia have been withholding production since January last year and the cuts are set to last through 2018.

This restraint has coincided with healthy oil demand.

"Oil remains underpinned by the solid economy with strong oil demand tightening global oil inventories. The past years' surplus supplies are slowly disappearing," Ruecker said.

One factor that in 2017 prevented crude prices from rising further was a surge in U.S. production.

Despite a recent drop due to extreme cold, U.S. crude output is expected to soon break through 10 million barrels per day (bpd), challenging top producers Russia and Saudi Arabia.

Dollar index wallows at three-year lows, euro buoyed by ECB taper hopes

The dollar languished at three-year lows against a basket of currencies on Monday, while the euro stood tall on investors' hopes that European Central Bank policymakers could be poised to further trim their monetary stimulus.

The dollar index, which tracks the greenback against a basket of currencies, slipped 0.2 percent to 90.807 (DXY) after falling as far as 90.773 earlier in the session, its lowest since January 2015.

The euro added 0.1 percent to $1.2206 , in sight of a peak of $1.2218 on Friday, its highest since December 2014, leaving some strategists to ponder where its next top might be.

"I think the strength of the euro is overdone," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

"The strength of the euro itself will delay the ECB's normalization. The ECB is conducting verbal tightening, so they don't need to move on interest rates."

Against the yen, the dollar slipped to its lowest levels since mid-September, as comments from Japan's central bank governor highlighted Japan's economic recovery.

While Bank of Japan Governor Haruhiko Kuroda reiterated the central bank's resolve to maintain its massive stimulus program until 2 percent inflation is achieved stably, he also said the country's economy was expected to continue moderately expanding.

Core consumer prices are rising around 1 percent, Kuroda said in a speech to BOJ regional branch managers. This was a slight change from his previous speech to branch managers, when he said core consumer prices were around zero.

The dollar was 0.3 percent lower at 110.73 yen , after earlier falling as far as 110.63.

"We continue to see dollar/yen sellers, to be honest," said Bart Wakabayashi, branch manager for State Street Bank in Tokyo.

"Let's see if we start to see some rumblings from Japanese officials, about yen strength," he said. "We might see some comments to calm market expectations of yen strength."

Sterling edged up 0.1 percent to $1.3739 , probing its highest levels against the dollar since the Brexit vote in June, 2016.

The British currency jumped on Friday, after a media report that the Netherlands and Spain were open to a deal for Britain to remain as close as possible to the European Union.

The pound shrugged off a denial from officials from the Spanish and Dutch finance ministries, who said there was no new agreement between the countries on how Britain should leave the EU.

Speculators' net short dollar positions rose in the latest week through Jan. 9 to their largest since mid-October, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

Asian shares hit historic highs

Asian shares hit historic highs on Monday after Wall Street extended its record-breaking run, while the U.S. dollar retreat continued as investors priced in the risk of tighter policies elsewhere in the developed world.

Activity was restrained somewhat as a U.S. holiday curbed trade in cash Treasuries, though E-Mini futures for the S&P500 still made gains of 0.26 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7 percent, having finally cleared the former all-time top of 591.50 from late 2007.

Australia's main index firmed 0.1 percent, while Japan's Nikkei added 0.3 percent.

Stocks in Hong Kong jumped 0.9 percent from Friday's record closing high. Investors were optimistic that Chinese gross domestic product data for the December quarter due on Thursday would show growth of at least 6.7 percent for the world's second biggest economy.

Wall Street was on a roll as the fourth-quarter earnings season kicked off with solid results from banks and robust retail sales, driving investor optimism about economic growth.

The Dow amassed gains of 2 percent last week, while the Nasdaq gained 1.8 percent and the S&P 500 1.6 percent. The S&P 500 and Nasdaq scored eight record closing highs out of the first nine trading days of 2018, while the Dow boasted its sixth closing high of the year.

Earnings for S&P 500 companies are expected to increase on average by 12.1 percent in the quarter, with profit for financial services companies likely to increase 13.2 percent, according to Thomson Reuters I/B/E/S.

"The big consensus trade of being short U.S. dollars into 2018 and long European and U.S. financials continues to work in earnest and this remains the key focal point in the week ahead," said Chris Weston, chief market strategist at broker IG.

"The decline in the USD index was actually the biggest sell-off since 27 June, with prices closing below the Sept. 8 low. It just shows how much sway the USD bears have right now."


The dollar index showed no sign of bouncing early on Monday, instead edging down to a fresh trough at 90.622.

The euro was up at a three-year peak of $1.2241 and holding all of Friday's 1.3 percent surge.

The single currency has been bolstered by speculation European Central Bank policymakers are preparing to temper their vast monetary stimulus campaign.

Also helping was news German Chancellor Angela Merkel's CDU party and the Social Democrats (SD) were moving toward formal coalition talks.

Leading members of the Social Democrats said on Sunday they would press for improvements to the coalition blueprint, seeking to win over skeptical party members who can torpedo the deal.

The dollar slipped to a six-week low on the yen at 110.73 yen, even as the head of the Bank of Japan reiterated his commitment to keeping yields low.

The Chinese yuan hit hit a two-year high of 6.4155 per dollar in offshore trade.

The pound was at its highest since mid-2016 at $1.3741, while the Canadian dollar held firm on wagers the country's central bank would hike interest rates at a policy meeting on Wednesday. [CAD/]

A softening U.S. dollar combined with resilient Chinese demand has been positive for most commodity prices.

Gold hit a four-month top of $1,344.7.

Oil prices consolidated following six straight sessions of gains, with output cuts led by OPEC and Russia as well as healthy demand keeping crude near December 2014 highs. [O/R]

Brent crude futures ticked up 12 cents to $69.99 a barrel, while U.S. crude rose 22 cents to $64.52.

Oil Stays At 3-Year Highs as U.S. Crude Stocks Fall More Than Forecast

Crude prices held on to gains on Wednesday, staying close to their strongest level in around three years after data showed U.S. oil supplies fell more than forecast last week.

The U.S. Energy Information Administration said in its weekly report that crude oil inventories fell by 4.9 million barrels in the week ended Jan. 5. That compared with analysts' expectations for a decline of 3.9 million barrels, while the American Petroleum Institute late Tuesday reported a supply-drop of 11.2 million barrels.

Supplies at Cushing, Oklahoma, the key delivery point for Nymex crude, decreased by 2.4 million barrels last week, the EIA said.

Total U.S. crude oil inventories stood at 419.5 million barrels as of last week, which the EIA considered to be in the middle of the average range for this time of year.

U.S. crude oil production fell by 290,000 barrels per day (bpd) to 9.49 million bpd.

The report also showed that gasoline inventories increased by 4.1 million barrels, much higher than expectations for a gain of 2.6 million barrels. For distillate inventories including diesel, the EIA reported a rise of 4.3 million barrels.

U.S. West Texas Intermediate (WTI) crude futures tacked on 32 cents, or about 0.5%, to $63.28 a barrel by 10:40AM ET (1540GMT). Prices were at around $63.34 prior to the release of the inventory data.

Meanwhile, Brent crude futures, the benchmark for oil prices outside the U.S., were at $68.95 a barrel, up 11 cents from their last close. The contract rose to its best level since May 2015 earlier.

Oil prices continue to benefit from production cut efforts led by the Organization of the Petroleum Exporting Countries and Russia. The producers agreed in December to extend current oil output cuts until the end of 2018.

The deal to cut oil output by 1.8 million barrels a day (bpd) was adopted last winter by OPEC, Russia and nine other global producers. The agreement was due to end in March 2018, having already been extended once.

In other energy trading, gasoline futures lost 1.4 cents, or 0.8%, to $1.831 a gallon, while heating oil was unchanged at $2.070 a gallon.

Natural gas futures shed 2.2 cents, or 0.8%, to $2.899 per million British thermal units. Prices have gained around 5% so far this week as investors reacted to the severe winter storm hitting much of the U.S. Eastern Seaboard.

Wall Street falls on China, NAFTA concerns

Wall Street's major stock indexes pared earlier losses on Wednesday while U.S. Treasury yields fell from their peak as investor skepticism grew about a report that China would slow purchases of U.S. government bonds.

Financial stocks were still the biggest percentage gainers by late afternoon, however, as investors reacted to the Bloomberg report on China, the world's biggest holder of U.S. Treasuries.

The S&P 500 pared some losses after falling as much as 0.6 percent after the report, which also pushed the dollar down.

"As the day wore on, Treasury yields started to move lower on the realization the story doesn't have any legs. That's definitely helped equities. There's no way on earth the Chinese stop buying U.S. Treasuries," said Robert Pavlik, chief investment strategist, SlateStone Wealth in New York.

The S&P also dipped on a Reuters report saying Canada is increasingly convinced President Donald Trump will soon announce the United States intends to pull out of the North American Free Trade Agreement. The report cited two unnamed government sources.

At 2:47 p.m. (1947 GMT), the Dow Jones Industrial Average (DJI) was down 30 points, or 0.12 percent, to 25,355.8, the S&P 500 (SPX) had lost 6.01 points, or 0.22 percent, to 2,745.28 and the Nasdaq Composite (IXIC) had dropped 25.29 points, or 0.35 percent, to 7,138.29.

The China report put the S&P and the Nasdaq on track to snap a six-day run of record closing highs as investors worried that the market was overdue for a correction.

"It's a reflection of investor weariness and awareness that the market has risen for four straight months without seeing a major pullback," said Pavlik. "They're on alert in case something develops."

The S&P financial index (SPSY) was last up 0.8 percent, helped by gains in Wells Fargo (N:WFC), Berkshire Hathaway (N:BRKa) and JPMorgan (N:JPM).

Banks and insurance companies often rise with bond yields as investors expect a profit boost from higher interest rates.

Rate-sensitive sectors such as utilities (SPLRCU) and real estate <.SPLRCREC> were the biggest percentage losers of the S&P's 11 major sectors.

The China report weakened the dollar (DXY), which was last down 0.2 percent, while safe-haven commodity gold jumped to its highest in four months.

Investors started the New year optimistic about global growth prospects and with high expectations for a strong U.S. quarterly earnings season which kicks off on Friday with reports from big banks.

Earnings for S&P 500 companies are expected to increase by 11.8 percent, with the biggest contribution from the energy sector, according to Thomson Reuters I/B/E/S.

Berkshire Hathaway (N:BRKb) rose 1.2 percent after the conglomerate promoted two top executives, cementing their status as the most likely successors to Warren Buffett.

Shares of Lennar Corp (N:LEN) gained 2 percent as No.2 U.S. homebuilder's orders and total revenue rose more than expected in the fourth quarter.

The Dow Jones Transport index (DJT), often seen as a gauge of the economy's health, pared its gains and was last up 0.1 percent after climbing as much as 0.7 percent following United Continental's (N:UAL) report of higher traffic for December.

Department store operator Kohl's (N:KSS) rose about 3.2 percent after two brokerages raised their price targets.

Declining issues outnumbered advancing ones on the NYSE by a 1.72-to-1 ratio; on Nasdaq, a 1.18-to-1 ratio favored decliners.

The S&P 500 posted 74 new 52-week highs and seven new lows; the Nasdaq Composite recorded 90 new highs and 23 new lows.

Asian shares step back from 2007 peak, oil at three-year high

Asian shares flinched from testing their 2007 record peak on Wednesday, as investors booked profits in high-tech shares while oil prices hit three-year highs due to production cuts and a fall in inventories.

European shares are expected to dip slightly with Germany's Dax futures down 0.2 percent and France's Cac futures and Britain's FTSE futures down 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.5 percent after six straight days of gains until Tuesday, that had taken it within a stone's throw from the record high touched in November 2007.

Information technology shares led the decline with a 1.4 percent fall as Samsung Electronics (KS:005930) extended losses. The tech company's profit guidance disappointed investors and raised worries the memory chip boom may be coming to an end.

Japan's Nikkei also shed 0.3 percent, slipping from 26-year highs hit the day before.

"The rally has been a bit too fast. Investors are taking profits in high-flying hi-tech shares. But the earnings and economic outlook in Asia remains solid," said Yukino Yamada, senior strategist at Daiwa Securities.

Indeed, expectations of solid corporate profit growth helped

Wall Street's major indexes extend the New Year rally to record levels for a sixth day on Tuesday.

"U.S. fourth-quarter earnings are expected to rise more than 10 percent from the previous year. The market has been supported by the consensus that the goldilocks economy will continue while the Fed will raise interest rates only slowly," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Profits for S&P 500 companies are expected to rise 11.8 percent in the fourth quarter, compared with an 8-percent increase a year earlier, according to Thomson Reuters I/B/E/S.

Some investors said risk sentiment had been boosted by an apparent easing in tensions in the Korean peninsula after North and South Korea agreed to future talks in their first official dialogue in more than two years.

Washington welcomed what it said was a first step to solving the North Korean nuclear weapons crisis, even though Pyongyang said those were aimed only at the United States and not up for discussion with Seoul.

In the currency market, the yen maintained the gains it made the previous day after the Bank of Japan trimmed the amount of its buying in long-dated bonds.

While the move was in line with the BOJ's subtle reduction in its bond buying over the past year, the so-called 'stealth tapering', the reaction highlighted how sensitive markets are to a pullback in Japan's massive stimulus.

"I don't think yesterday's operation is a hint of a policy change. But it highlighted the fact that unwinding of central bank stimulus will be a main theme this year. We could see more moves like this," said a currency trader at a U.S. bank.

The Japanese government bond yield ticked up to 0.080 percent, the top of its range in the past several months.

The euro eased to $1.1945, compared to $1.2028 at the end of last week, due to profit-taking following the common currency's big gains late last year.

The BOJ's move also helped to raise the 10-year U.S. bond yield above its December high to 2.573 percent, the highest since March last year, from 2.482 percent late on Monday.

Oil prices extended gains, with U.S. crude futures hitting a three-year high on a tight supply balance due to OPEC-led production cuts and a sharper fall in U.S. crude inventories.

The American Petroleum Institute said late on Tuesday crude inventories fell by 11.2 million barrels in the week to Jan. 5 to 416.6 million, far bigger than analysts' expectations for a decrease of 3.9 million barrels. [API/S]

U.S. West Texas Intermediate (WTI) crude traded at $63.49 a barrel, up 0.9 percent for the day, after having risen as high as $63.53 earlier.

Brent crude rose 0.6 percent to $69.22 per barrel, staying near its highest level since mid 2015.

Rising oil prices could fan inflation down the road, which could be detrimental to some countries that have been prone to high inflation.

Still, China's December producer prices grew at their slowest pace in 13 months as the government's stepped-up war against winter smog dented factory demand for raw materials.

The producer price index (PPI) in December rose 4.9 percent from a year earlier, compared with 5.8 percent in November, the National Bureau of Statistics (NBS) said on Wednesday.