Asian shares fell on Tuesday as a report of fresh missile tests by North Korea added to market tensions at a time when investors are questioning if they are too optimistic about the global economic outlook.
Seoul shares fell more than 2 percent and Tokyo slipped a fifth of a percent after North Korea was roundly condemned for raising international tensions following a nuclear test on Monday.
A report that North Korea had fired more missiles on Tuesday came after both Seoul and Tokyo markets had closed.
The dollar edged higher, but remained near a five-month low hit last week against a basket of currencies, as profit-taking hit higher-yielding currencies that had benefited from hopes the worst of the global economic crisis was now over.
European shares were set to fall as well, while other assets seen as having a higher risk, including oil, retreated.
Asia has grown accustomed to Pyongyang's saber-rattling so analysts generally believe the market impact of the missile tests will be short-lived.
But the tensions are occurring as optimism about the strength and speed of a global economic recovery is being replaced by some doubts.
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.
Consumer sentiment figures from South Korea and manufacturing data from Singapore on Tuesday added to recent reports offering some signs that the first quarter marked the trough of the global downturn.
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.
Among the global data that could help determine the course of markets this week is U.S. housing and consumer confidence.
The fresh market uncertainty followed a report from South Korea's Yonhap news agency that North Korea was preparing to launch more short-range missiles.
It later reported that North Korea had test fired a short-range missile, although both the Seoul and Tokyo stocks markets had already closed.
The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> fell 0.5 percent as of 0651 GMT (2:51 a.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 last week has stalled in the past several sessions.
Japan's Nikkei average <.N225> closed down 0.4 percent, while Seoul shares <.KS11> pulled back 2.1 percent.
Most other indexes were lower, though Australia <.AXJO> rose 1.1 percent after Rio Tinto
The dollar index <.DXY>, which measures the dollar's against six major currencies, edged up 0.15 percent to 80.140, 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 during the financial crisis.
A test of whether investors 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 94.77 yen, down from 95.10 yen in late Asian trade on Monday.
Crude retreated 70 cents to $60.97 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.