Asian stocks edged higher on Thursday after solid corporate earnings, including from Toyota Motor and chipmaker UMC, and strong U.S. economic data that lifted the beaten-down dollar.
The upbeat U.S. reports on the services sector and private jobs eased some worries about a stumbling economic recovery and prompted Japanese government bonds (JGB) to pull back from Wednesday's rally, when yields fell to a seven-year low.
Data from the Institute for Supply Management showed the services sector grew at a faster pace than expected in July. In a separate report, payroll-processing company ADP said private employers added more jobs in July than forecast.
Strong results from Toyota Motor Corp <7203.T> boosted sentiment and propelled Japan's benchmark Nikkei average <.N225> 1.2 percent higher, reversing much of Wednesday's 2.1 percent drop when investors worried that a yen rally toward 15-year highs would hit exports.
Toyota climbed more than 3 percent before losing some steam after reporting its biggest operating profit in two years and lifting its forecasts.
In Taiwan, United Microelectronics Corp (UMC) <2303.TW>, the world's second-biggest contract chipmaker, lifted the market by reporting strong quarterly earnings and an increase in its 2010 capital spending plans.
Japan's benchmark 10-year government bond yield rose from a 7-year low to above 1 percent, with bonds sold on profit-taking as Tokyo stocks recouped some of the ground they lost a day earlier and after the dollar rebounded against the yen.
The dollar rose to 86.29 yen from an eight-month low of 85.32 on Wednesday, moving away from the closely watched level of 84.81, a 15-year low for the dollar struck in November.
The dollar index <.DXY> edged up 0.1 percent to 80.983, putting it back above its 200-day moving average at 80.768. However, it still needs to get past 81.650 to break a bear trend of the past seven weeks. Otherwise, it risks falling to its April low of 80.031.
The optimism reflected in the U.S. data has offset to some extent expectations the U.S. Federal Reserve might take further steps into quantitative easing at its policy meeting next week, undermining safe-haven U.S. Treasuries and JGBs.
So not only is the services sector - the vast bulk of most modern economies - expanding, it is doing so at a faster pace, said Adam Carr, a senior economist at broker ICAP, referring to the U.S. data.
Commodities are telling us that this global recovery has reasonable momentum, he said, adding that iron ore prices had risen around 20 percent in the past month, while copper was up 16 percent and wheat 40 percent.
Commodity-linked currencies such as the Australian and Canadian dollars remained strong.
The Aussie hovered around three-month highs against the dollar and the dollar slipped to its lowest in six weeks against the Canadian currency.
On Thursday, the MSCI index of Asia Pacific ex-Japan stocks <.MIAPJ0000PUS> was up 0.1 percent, after rising 2.3 percent this week to a three-month high. Consumer staples <.MIAPJCS00PUS> and resources <.MIAPJMT00PUS> were the drivers.
Investors are tempted to lock in profits as the market continues to renew 2010 highs this week, said Kwon Byung-ryol, an analyst at Eugene Investment And Securities.
But rising momentum remains intact and the market could rebound any time, because we have no firm data yet indicating the economy is set to slow down sharply.
Aggressive bets are also coming off ahead of the U.S. jobs data on Friday with the government report expected to show a drop of 65,000 in July as Census jobs dried up.
Oil prices fell for a second straight day, moving toward $82 a barrel, crimped by the dollar's strength and after U.S. stocks of gasoline and distillate fuels, including diesel, added to a string of gains.
(Additional reporting by Aiko Hayashi in TOKYO and Wayne Cole in SYDNEY)