Asian shares edge up as investors await Yellen testimony

By Lisa Twaronite

TOKYO (Reuters) - Asian shares and the dollar cautiously edged higher on Tuesday, as investors awaited testimony from Federal Reserve Chair Janet Yellen for clues on when the central bank would tighten U.S. monetary policy.

MSCI's broadest index of Asia-Pacific shares outside Japan edged a few points higher in early trading, with sentiment underpinned by technology-led gains on Wall Street.

Japan's Nikkei stock index <.N225> was up 0.1 percent, while Australian shares <.AXJO> slipped 0.2 percent.

The dollar index, which tracks the greenback against a basket of six major rivals, added 0.1 percent to 96.094 ahead of Yellen's semi-annual monetary policy testimony before Congress on Wednesday and Thursday.

"Normalisation of monetary policy in the coming months is almost priced in, and the Fed will start shrinking its balance sheet in September, and this does not necessarily mean a delay of rate hikes," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"This is supporting the dollar as a positive factor, and limiting its downside at the moment," he said. "I think Yellen will confirm that rate hikes are coming, and that balance sheet shrinkage will come."

Against its Japanese counterpart, the dollar added 0.2 percent to 114.21 , moving back toward a two-month high of 114.30 touched overnight, while the euro inched slightly lower on the day to $1.1393 .

The Canadian dollar was nearly flat against its U.S. counterpart as investors awaited a Bank of Canada interest rate decision on Wednesday.

Forecasters are divided on whether the central bank will raise rates but data from the overnight index swaps market shows that money markets are almost fully priced for an increase, while an 80 percent chance of a second hike has been implied by December.

Crude oil prices extended their overnight gains, even as increased drilling activity in the United States and uncertainty over Libyan and Nigerian production cuts clouded the future supply outlook. [O/R]

U.S. crude futures rose 0.4 percent to $44.56 a barrel after adding 0.4 percent on Monday, while Brent crude was 0.3 percent higher at $$47.04.

(Reporting by Lisa Twaronite; Editing by Sam Holmes)