The dollar looked set to post its first weekly loss in three weeks as investors increased bets on risky assets like equities on expectations the United States would take a long time to raise interest rates after weak economic data this week.
Despite the meager gains posted by stocks on Friday, markets have drifted aimlessly this week, lacking any fundamental drivers after the end of the earnings season and a brutal commodity markets rout earlier this month.
Japanese shares <.N225> ended the day down 0.1 percent at 9607.08 after the Bank of Japan kept interest rates on hold at the end of a two-day policy meeting at which it warned that the economy will remain under strong downward pressure for the time being.
Outside Japan, the broader Asian market represented by the MSCI index ex-Japan edged up 0.1 percent.
Korean shares <.KS11> rose 0.8 percent despite foreign selling, while Australian shares <.AXJO> fell 0.5 percent, led by miners.
Smart, short-term money which flowed in March and April is withdrawing. I am getting a sense that a lot of it is European, said Chung Yun-sik, chief investment officer at ING Investment Management. Chung said the pull-back could be linked to ongoing debt issues and the fragility of Europe's banking sector.
Technology companies, in particular the Chinese internet sector, might get a look in after LinkedIn's
Tencent <0700.HK>, China's dominant internet firm, looks poised to benefit from lofty valuations that social media firms are fetching despite its 31 percent gains so far this year, as the stock approaches a record high hit last month.
Overnight, data showed a slowdown in manufacturing growth in the U.S. Mid-Atlantic region and an unexpected dip in existing home sales in April.
That cemented views that if economic data continues to disappoint, it could delay Fed action until well into 2012 or later, encouraging investors to hunt for yields, especially in Asian fixed income markets.
Solid responses to recent credit issues have already taken the year-to-date volume in the Asian primary market to $44.7 billion, more than half of last year's record $83.4 billion. Morgan Stanley has projected the annual tally could end up in excess of $100 billion at the current pace.
Emerging market debt funds more than doubled inflows to $223 million in the week of May 18 from the prior period, according to Thomson Reuters Lipper data.
In currency markets, the soft patch of U.S. data gave the euro a brief respite after recent heavy selling, with the euro holding much of its overnight gains versus the dollar.
Notwithstanding Friday's small gains, the euro remains around 4 percent below an early May peak of $1.4940 after a rout in commodities spooked investors, prompting the unwinding of dollar-funded bets in risky assets.
Financial markets remained on edge amid lingering concerns about the possibility of debt restructuring in Greece and before the U.S. Federal Reserve's bond-buying program winds down next month.
The 19-commodity Reuters-Jefferies CRB index <.CRB>, a popular gauge for market performance, has steadied after tumbling 9 percent from an April 29 high, while oil climbed before a contract expiry and spot gold rose on bargain hunting.
U.S. Treasury yields softened on weak data with the 10-year U.S. Treasury yield hovering around 3.17 percent, though some analysts warned the market's six-week rally was near an end. Yields have fallen from as high as 3.62 percent on April 8.