Asian stocks firm as Fed looms large, yuan slips

Asian shares firmed on Tuesday as recently volatile crude oil prices showed some stability, though gains were limited by caution ahead of a widely anticipated US interest rate increase by the Federal Reserve.

China's yuan, meanwhile, weakened against the dollar after the People's Bank of China (PBOC) set its official midpoint rate at its lowest level in more than four years for a second day.

MSCI's broadest index of Asia-Pacific shares outside Japan extended early gains and added 0.5%.

But Japan's Nikkei stock index slipped about 0.3% ahead of the expected US rate increase.

"Investors remain jittery before the event, but after some correction, the market will likely provide bargain hunting opportunities," said Masayuki Kubota, chief strategist at Rakuten Securities. "A US hike signals a US economic recovery, and it is generally positive to the Japanese market."

On Wall Street, major indexes erased early losses and marked gains as oil prices found their legs. S&P 500 e-mini futures were up 0.3% in Asian trade.

US crude oil edged up 0.1% to $36.37 after falling as low as $34.53 on Monday before rebounding to end nearly 2% higher.

Brent crude inched slightly higher to $37.94 after falling as low as $36.33 a barrel on Monday, its weakest since December 2008. A fall below $36.20 would take oil down to levels not seen since 2004.

Besides the direction of oil prices, the outlook for Fed monetary policy loomed large in the markets' collective consciousness. Investors have mostly priced in a rate hike this week, with the main question now hinging on how many increases will follow next year.

Traders see an 83% chance the Fed will lift its targeted rate range from 0.25% to 0.50% at the two-day policy-setting meeting ending on Wednesday, from the current zero to 0.25% range, according to CME Group's FedWatch program.

"Most investors would normally look to buy a currency ahead of a rate hike but in the case of the Fed, their well-telegraphed decision could mean more losses for the greenback," Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note to clients.

"Everyone who wants to be long dollars ahead of the rate decision is probably long already with more traders moving to the sidelines as the big day nears," she said.

In Asian trade, the dollar edged down about 0.1% against a basket of currencies to 97.504.

It was nearly flat against the Japanese currency at 121.02 yen, while the euro was slightly higher at $1.1011.

The Australian dollar added about 0.5% to$0.7279, bolstered by relatively upbeat minutes from the Reserve Bank of Australia's December policy review, which said recent positive economic trends suggested a steady interest rate outlook in the near term.

Spot gold prices edged up, nursing losses after they skidded 1% on Monday, with the metal changing hands at $1,064.45 an ounce. Investors have been cutting gold positions in anticipation of the Fed's rate increase.