Asian shares rise as investors await Yellen testimony

By Lisa Twaronite

TOKYO (Reuters) - Asian shares extended early gains on Tuesday and the dollar notched a four-month high against the yen, 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 was up 0.6 percent, with sentiment underpinned by technology-led gains on Wall Street.

Japan's Nikkei stock index rose 0.5 percent, buoyed by a weaker yen, while Australian shares pared some of its earlier losses.

"Except for worries about North Korea, the situation in Asia is calm at the moment, and this is giving some relief to investors," said Kyoya Okazawa, head of global markets, Japan and Korea, at BNP Paribas.

"The dollar has risen above the 114 level, and this is lifting Japanese shares," he said.

China stocks were mixed as blue-chips firmed while small-caps extended falls on expectations of more equity supply. The CSI300 index rose 0.5 percent, but the Shanghai Composite Index shed 0.2 percent.

The dollar index, which tracks the greenback against a basket of six major rivals, added 0.2 percent to 96.163 ahead of Yellen's semi-annual monetary policy testimony before Congress on Wednesday and Thursday.

San Francisco Federal Reserve President John Williams said Tuesday in Sydney that it was a reasonable view to expect one more rate hike this year, and his own view was to start adjusting the central bank's balance sheet in the next few months.

"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 0.3 percent to 114.43, its highest level since mid-March.

The euro inched 0.1 percent lower on the day to $1.1387.

The Canadian dollar was down slightly 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.

U.S. crude futures rose 0.4 percent to $44.58 a barrel after adding 0.4 percent on Monday, while Brent crude was 0.4 percent higher at $$47.08.

Spot gold edged 0.2 percent lower to $1,212.00 an ounce, moving back toward near four-month lows touched in the previous session.

(Reporting by Lisa Twaronite; Editing by Sam Holmes and Jacqueline Wong)