Asian shares edged lower on Tuesday with stocks in Seoul down 1.2 percent after North Korea threatened to launch more missiles and while investor doubts about the world economy kept riskier assets such as the euro under pressure.
North Korea further raised tensions after its nuclear test on Monday, though analysts believe the market impact will be short-lived in a region growing accustomed to Pyongyang's actions
The dollar edged higher against major currencies, but not too far off its recently hit lows for the year. U.S. Treasury auctions this week will test the allure of dollar assets at a time of growing worries about the country's deficits.
After strong gains in riskier plays such as emerging market stocks over the past couple of months, investors are hesitating over how much further to push the rally, given the doubts about the strength or speed of any recovery.
The indecision was particularly evident as recent gainers such as oil retreated amid a lack of driving factors after U.S. and British markets were closed on Monday for a public holiday.
As was the case with the nuclear test yesterday, news of yet another North Korean missile launch would have a relatively short-lived impact on markets. This will actually offer opportunities to buyers to pick up stocks at lower prices, said Lee Kyoung-su, an analyst at Taurus Investment & Securities.
Market participants are more concerned with macroeconomic factors, such as a batch of data from the United States due out this week. More falls are expected if the data proves to be disappointing, added the Seoul-based analyst.
Recent data from Seoul to Taipei is hinting that the first quarter marked the worst in the biggest global economic crisis since World War Two.
The pace of falls in global exports are slowing, industrial output is improving, while consumer and business sentiment is picking up. South Korea on Tuesday said its key consumer sentiment rose to its highest in nearly two years in May.
The question now is how soon, or fast, a recovery will take shape. That is something that central bankers -- with Malaysia holding a policy meeting later on Tuesday -- are grappling with as they seek to determine whether to stop cutting interest rates.
The economies of both the United States and China aren't just going to surge rapidly upwards, and what we're seeing today is probably a bit of a reality check, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Among the global data that could help determine the course of markets is U.S. housing and consumer confidence this week.
The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> was down 0.25 percent as of 11:34 p.m. EDT. A rally that had taken the index up more than 50 percent from its yearly low in early March to its 2009 high just last week has stalled over the past several sessions.
Japan's Nikkei average <.N225> lost 0.7 percent, while Seoul shares pulled back 1.2 percent.
Other indexes were higher, but not by much. Taiwan <.TWII> was the leading gauge with a 0.2 percent gain.
The dollar index <.DXY>, a gauge of the greenback's performance against six big currencies, edged up 0.17 percent to 80.158, though that was not too far off a five-month trough of 79.805 hit on Friday.
The U.S. currency was routed last week on fears that the United States would lose its top AAA rating due to its widening debt levels.
A test of whether investors, particularly China, are willing to continue financing the U.S. deficit will come this week when the U.S. Treasury sells $101 billion in U.S. Treasury notes spread out from Tuesday through Thursday.
The euro remained under pressure on Tuesday, partly due to profit-taking after a recent rally of about 8 percent in a month against the dollar and after Germany's Ifo measure of corporate sentiment rose by less than expected.
The euro was last at $1.398 against the U.S. currency, edging lower on the day, while against the yen the dollar traded at 94.66 yen, down from 95.10 yen in late Asian trade on Monday.
Crude retreated 74 cents to $60.94 a barrel ahead of OPEC's meeting on Thursday that is expected to result in no changes to oil supply.
A recent rally in oil prices was dented last week amid worries about attacks by militants against the oil industry in Nigeria.