By Ankur Banerjee

SINGAPORE (Reuters) – Asian stocks eased near two-and-half-year highs on Tuesday, and the U.S. dollar strengthened following hawkish remarks from Federal Reserve Chair Jerome Powell, which dashed expectations of significant interest rate cuts. Meanwhile, tensions in the Middle East maintained a cautious risk sentiment.

Oil prices held steady, and gold traded just below last week’s record high as investors awaited U.S. labour data for more insight into the pace of potential rate cuts.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.13% to 620.05 on Tuesday, slightly under the two-and-a-half-year high of 627.66 reached on Monday. The index has increased by 17% so far this year.

Japan’s Nikkei rose 1.5% in early trading after declining 4.8% on Monday, with investors reacting to perceived monetary policy hawk Shigeru Ishiba winning a contest to become the country’s prime minister. Japanese stocks were supported by a softer yen, trading at 144.09 per dollar early on.

As mainland China’s financial markets closed for the week, the recent rally buoying Asian markets is likely to pause. Hong Kong’s Hang Seng is also closed on Tuesday.

A series of economic stimulus measures has resulted in a significant rise in beaten-down Chinese stocks, with the blue chip CSI300 increasing by 25% since the beginning of last week as global investors prepare to invest in China again.

“I think we’re in for some choppy trade until U.S. data comes to flow in,” stated Matt Simpson, senior market analyst at City Index, noting thin trading volumes due to the closure of Chinese markets.

NO HURRY

Investor attention has shifted to the pace of rate cuts from the Fed after the U.S. central bank initiated an easing cycle last month with a 50 basis-point cut. Fed Chair Powell indicated on Monday that the U.S. central bank would likely adhere to a more cautious strategy of quarter-percentage-point cuts following new data that raised confidence in economic growth and consumer spending.

“This is not a committee that feels like it is in a hurry to cut rates quickly,” Powell remarked.

This statement led traders to reassess expectations, with the probability of a 50 bp cut next month dropping to 38% from 53% on Friday, based on the CME FedWatch tool. Market participants now anticipate 70 bps of easing this year.

The changing expectations surrounding rate cuts boosted the dollar, leading to a slight increase in the dollar index at 100.77. The euro remained stable at $1.11355.

“As per usual, Powell is not being swayed by market pricing,” commented City Index’s Simpson. “The indication that cuts are not on a predetermined course should serve as a warning to USD bears, given data has generally surprised to the upside in recent weeks.”

With the Fed focusing on the labour market, Tuesday’s job openings data for August and the ISM manufacturing survey for September will be crucial for rate expectations and the dollar, according to economist Kristina Clifton at the Commonwealth Bank of Australia.

“The dollar can remain under pressure if this week’s data shows the U.S. labour market remains in reasonable shape.”

In commodities, oil prices remained stable in early trading on Tuesday as concerns about additional supply amid lacklustre global demand growth balanced worries that escalating conflicts in the Middle East could disrupt exports in the key producing region. Brent crude futures rose 0.11% to $71.78 a barrel, while U.S. West Texas Intermediate crude futures increased by 0.07% to $68.22 a barrel.

Spot gold saw a 0.11% rise, reaching $2,637.56 per ounce, remaining close to its record high of $2,685.42 set last Thursday. Gold rose 13% over July-September, marking its best quarterly performance in over four years.