MSCI's broadest index of Asia-Pacific shares outside Japan inched down 0.3 per cent after rising to a three-month high on Thursday, but was set for its largest weekly gain since late January.
Japan's Nikkei stock average dropped 0.6 per cent to below the psychologically key 9,000 mark, after hitting it for the first time in five weeks on Thursday.
U.S. and European equities rallied for a fifth straight day on Thursday, with the leading index of European shares nearing a 2012 peak. Indicating a steady rise in risk appetite, the Euro STOXX 50 volatility index, Europe's main gauge of equity market investor anxiety, hit a three-week low.
"We view the recent recovery in risky asset prices as a continuation of the recovery from the April-May market downdraft," Barclays Capital analysts said in a research note.
"While positioning and sentiment seem broadly supportive for now, and upside risks remain, we think it makes sense to begin to fade the recent rally, and position more cautiously for a potentially eventful September," they wrote.
Markets have been pinning their hopes on the possibility that the European Central Bank will start buying sovereign bonds to lower borrowing costs for Spain, and that the Federal Reserve will expand its monetary easing, despite suggestions from the authorities that no steps were likely before September.
ECB governing council member Christian Noyer reiterated on Thursday that the ECB was determined to bring down the excessive borrowing costs hurting Spain and Italy and should be ready to intervene decisively in bond markets very soon, adding that a Greek exit from the euro zone was not envisaged.
China's softening inflation and industrial output data on Thursday reinforced market expectations that Beijing will further loosen monetary policy before the end of September to underpin growth.
China is scheduled to report its July trade data on Friday.
Commodities were trading in tight ranges, with oil steadying, copper a tad lower and gold drifting slightly lower.
YIELD HUNT SETS TONE
As investors continue to hunt for higher yields, the dollar/yen will be underpinned by a changing view that firmer growth prospects are dampening expectations of more Fed bond buying and exerting upward pressures on U.S. yields, said Yuji Saito, director of foreign exchange at Credit Agricole Bank in Tokyo.
Demand for safe-haven U.S. Treasuries eased after data showed on Thursday that the number of Americans filing new jobless benefits claims fell last week and the U.S. trade deficit in June was the smallest in 1-1/2 years, as lower oil prices curbed imports.
The dollar/yen is typically weighed down in August on speculation of a large amount of bond redemptions in U.S. Treasuries, as well as coupon payments due in August. Such action could spur Japanese investors holding Treasuries to sell the dollar against the yen to repatriate some of the proceeds.
Saito said the euro may draw support from similar repatriation by European funds in need of cash, as well as investors and traders reducing their dollar long positions ahead of the summer holidays.
"There are reasons to be concerned, but a lack of fresh factors or comments from key European figures to prompt further euro selling has led traders to adjust their positions," he said.
The euro traded at $1.2297, off Thursday's low of $1.2266 but below a one-month high of $1.2444 hit on Monday.
The euro has remained resilient despite the risk of the region's debt crisis deepening, but has failed in its recent rally to sustain a break above key resistance at the 55-day moving average, now around $1.2400.
Despite its yield advantage, the Australian dollar
edged lower against the U.S. dollar and all-time peaks on the euro on Friday, after the nation's Reserve Bank warned a high local currency posed an important risk to growth, even as it upgraded its economic outlook.
Asian credit markets steadied, with the spread on the iTraxx Asia ex-Japan investment-grade index little changed to stay near a four-month low.
Brent was barely changed at $113.22 a barrel and U.S. crude inched up 0.1 per cent to $93.47 a barrel. Spot gold eased 0.2 per cent to $1,614.21 an ounce and copper held steady at $7,537.75 a tonne.
Copyright @ Thomson Reuters 2012