Asian shares drifted up toward a one-month high on Thursday as Chinese bank shares bounced higher on hopes of a near-term pause in policy tightening, while the euro steadied before a widely expected rate hike from the European Central Bank later in the day.
Most equity markets in the region posted slight gains following a rise on Wall Street as investors looked beyond the latest bout of nervousness over the euro zone debt crisis after Moody's slash in the ratings of Portugal sparked a selloff in peripheral bonds.
The sharp drop in the bonds of Portugal and Greece came just a week after investors had breathed a sigh of relief that Greece had passed tough austerity measures needed to win a near-term bailout, thereby avoiding a default.
The ECB is widely expected to lift rates for a second time this year to 1.5 percent but then also step back for a few months as it battles with the debt crisis and sticks to a hardline view of trying to avoid an outright default.
The ECB is set to hike policy rates by 25 basis points today, but the recent deterioration in market sentiment should at least argue for more caution moving ahead, said market analysts at Credit Agricole CIB in a note to clients.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.2 percent in early trade, pushing back near a one-month peak.
Bank shares helped lead gains in Hong Kong as investors judged that the People's Bank of China is getting closer to taking a break from its multiple increases in policy rates and bank reserve requirements as the economy shows signs of losing steam.
The Hang Seng index <.HSI> edged up 0.3 percent, recouping some of the losses from the previous day when a sale of Chinese bank shares by Singapore sovereign fund Temasek prompted a broad drop. China Construction Bank <0939.HK>, one of the banks sold by Temasek on Wednesday, was up 0.3 percent.
But the Shanghai Composite <.SSEC> gave up early gains and fell 0.5 percent on a slide in energy stocks.
Japan's Nikkei average <.N225> dipped 0.1 percent, slipping back after a push through chart resistance the previous day to a four-month high sparked buying by model funds.
The Australian dollar jumped after data showed a robust increase in June employment showed the economy was holding up well despite recent reports showing households becoming more cautious on spending.
The Aussie was up 0.4 percent against the dollar at $1.0736, while the euro was steady at $1.4320.
Gold prices were little changed at $1,528.20 an ounce, while U.S. crude oil was up 66 cents to $97.31 a barrel.
(Editing by Ramya Venugopal)