Asian stocks rose on Tuesday, with the Nikkei gaining more than 1 percent , on optimism that companies will report strong earnings, while the euro held near a two-month high.
The euro could get a further boost if the U.S. Federal Reserve maintains a cautious view of the U.S. economic recovery after a two-day policy meeting on Tuesday and Wednesday.
Markets are increasingly speculating that the European Central Bank will lift interest rates ahead of the Fed, after recent tough comments by ECB chief Jean Claude Trichet about the need to keep inflation in check.
Optimism about euro zone policymakers' determination to continue working toward enhancing the European Financial Stability Facility and finding a longer term resolution to the region's sovereign debt crisis remains in place, said Michael Woolfolk, strategist at BNY Mellon.
Japan's Nikkei average <.N225> rose for a second straight session, advancing 1.2 percent , lifted not only by gains in New York and London overnight but by local optimism ahead of major corporate earnings reports.
Exporters including Canon <7751.T> and Kyocera <6971.T> are due to report this week, which could set the tone for earnings season which will last until early February. Canon rose 0.7 percent on Tuesday, while Kyocera added 1.8 percent .
This isn't going to be a regular earnings season, said Masayoshi Okamoto, head of dealing at Jujiya Securities.
Stocks have risen a lot over the quarter and strong earnings are at least partly priced in by investors, so they will not only want to see the figures for the quarter but also how those firms can sustain growth in the long run.
The Bank of Japan, ending a two-day policy meeting, kept monetary policy extremely loose as expected, and reviewed its long-term forecasts.
The central bank upwardly revised its consumer price forecast for the fiscal year beginning in April, reflecting the impact of recent rises in commodity prices, while roughly maintaining its economic growth forecasts.
The MSCI index of Asian stocks outside Japan <.MIAJ00000PUS> rose 0.5 percent after recording its worst weekly performance in almost two months last week. It is down 1 percent for the month.
Shares of resource companies gained on a rise in industrial metals prices, with the MSCI ex-Japan materials index up 0.8 percent.
Worries about mounting inflationary pressures have spooked some investors into selling out of emerging Asian markets and taking profits after strong rallies in 2010, but rather than leaving the region completely investors are channelling money toward countries seen as better placed to deal with price pressures.
Indonesian bond yields have jumped and stocks have retreated as investors cut their holdings, worried that the country, one of the darlings of emerging market investors in recent years, does not have a tight grip on inflation.
Investors in major emerging markets are also closely watching India's battle against stubborn inflation, which has been aggravated by surging global commodities prices and domestic supply pressures . India's central bank as expected raised key rates by 25 basis points on Tuesday, the seventh increase in the past year.
EURO CLINGS TO GAINS
The euro held near a two-month peak in Asian trade, hovering around $1.37 and bringing into focus its next resistance level of $1.3742.
The single currency, which has risen 6 percent in the past two weeks, was supported by hopes for a lasting solution to the debt crisis in the euro zone, and talk that the ECB may raise interest rates.
Demand from Asian central banks has also spurred wider buying in the common currency.
The Australian dollar fell by around 0.3 percent on weaker than expected consumer price data, strengthening expectations that the central bank is likely to keep interest rates unchanged for some time.
Positive sentiment across the broader economy knocked gold lower, with the metal falling to a 10-week low as demand from risk-averse investors waned.
Spot gold slipped to $1,332 per ounce, well down from the record high of $1.430.95 it touched in December.
U.S. crude futures fell for the sixth day running, shedding 33 cents to $87.
(Additional reporting by Antoni Slodkowski and Hideyuki Sano in Tokyo; Editing by Kim Coghill)