Asian stocks drifted lower after initially hitting a one-year high on Wednesday and the dollar hovered near a one-year low, with investors taking a breather from moving money into riskier assets in the hope that the global recovery is strengthening.
The dollar has been battered this week as market participants have favored high-yielding investments and emerging markets, steering funds away from the safe-haven U.S. currency. Gold's surge above $1,000 has also raised worries that money is being shifted out of the dollar.
The Australian dollar slipped after Australian retail sales surprisingly dropped in July and housing lending cooled. That raised doubts about how soon the central bank would start raising interest rates.
There has been sufficient strength in recent data and in comment from policymakers for a shift to a tightening bias at the October meeting, said Patrick Bennett, Asia FX and rates strategist at Societe Generale, referring to the Reserve Bank of Australia.
What is appropriately being called into question is the timing and extent of the action that follows.
Asia is at the forefront of unwinding ultra-loose monetary policies put in place to stem the shock from the financial crisis. With the growth revival in some countries proving unexpectedly strong, some policymakers worry that cheap money is fuelling asset bubbles.
Australia and South Korea are among the countries seen closest to pulling the trigger on higher rates, with investors focusing on a Bank of Korea meeting on Thursday for clues on how quickly a rate hike could come.
South Korean authorities are among the most concerned about a property price bubble. A report on Wednesday showed household mortgage lending slowed in August after tighter controls.
Portfolio managers have been undaunted by the prospect of monetary policy being normalized, with the process expected to be a drawn out one as officials remain cautious about the recovery's staying power.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> dipped 0.1 percent and gave up early gains that pushed the benchmark to a one-year peak.
So far this year the MSCI APXJ is up 53 percent, outpacing the nearly 23 percent rise in world shares and 10.5 percent increase in the MSCI index of Japanese shares.
Losses were mild across the region, with Japan's Nikkei average <.N225> dipping 0.3 percent and South Korea's KOSPI <.KS11> shedding 0.5 percent.
Technology shares remain among the best performing in Asia.
Hynix Semiconductor <000660.KS> rose nearly 1 percent after Merrill Lynch upgraded its rating on the world's No. 2 memory chip maker to buy from underperform and tripled its target price to 30,000 won.
In currencies, the dollar was little changed and held near a one-year low against a basket of currencies at 77.268 <.DXY>. The euro was flat at $1.4490 after having jumping as high as $1.4535 the previous day.
The dollar's slide, which analysts partly blamed on model funds dumping the currency due to the break higher in gold prices, has taken it through chart levels that suggest a deeper drop may be in store.
The dollar index has fallen through the 61.8 percent retracement of its rally from a record low hit in March 2008 to its highs reached in March this year, putting it on track to revisit the record low.
Gold rose $5.50 an ounce to $1000.70 and hovered just below the high of $1007.45 hit on Tuesday, putting it on course to target the record high of $1030 hit in March 2008 when the dollar hit its all-time lows.
Safe-haven government bonds edged up on the dip in stocks.
Korean government bond futures were up 11 ticks at 109.98 after hitting a five-week high of 110 in early trade despite the mounting expectations for a rate hike later in the year.
(Additional reporting by Charlotte Cooper in Tokyo; Editing by Jan Dahinten)