Asian markets retreat after rally, strong yen hits Tokyo

Asian markets turned south Thursday as investors took a breather after rallying this week on optimism over China-US trade talks and the Federal Reserve's softer tone on interest rates. There was also growing unease over the US government shutdown, which is now in its third week, after President Donald Trump walked out of a meeting with Democrats to resolve the issue, meaning it will likely drag on for some time to come. Tokyo led the losses, with exporters hit by a rising yen against the dollar after minutes from the Fed's latest policy meeting showed the policy board happy to slow its pace of rate hikes to prevent a slowdown in the economy.

Central bankers said they "can afford to be patient" owing to low inflation and uncertainty about the outlook and while there would likely be more increases in borrowing costs it would be a "relatively limited amount". The minutes reinforced comments from Fed boss Jerome Powell last week that there was no "pre-set" plan on rates, which fanned a global market rally.

Fears about rising costs were a key factor in driving equities lower last year. They also fuelled a dollar sell-off with the greenback weakening across the board and the Chinese yuan at its highest level since late August.

While the dollar stabilised against its major peers Thursday, it saw more losses against higher-yielding currencies, with the new-found optimism providing a boost to riskier assets. "I'm happy to see that there was caution in the minutes," Alicia Levine, chief strategist at BNY Mellon Investment Management, told Bloomberg TV.

"You want it to be that this is what the (Fed policy board) really believes, that caution is warranted, that they're going to be data-dependent, and there are alternative outcomes that they should be aware of. I take great comfort in these minutes." In early trade Hong Kong was down 0.3 percent after rising around five per cent over the previous four days, while Shanghai was 0.1 per cent off.

Sydney was also barely moved, while Singapore shed 0.2 per cent and Seoul eased 0.1 per cent. Despite the losses, there is a much happier mood on trading floors, helped by hopes of a breakthrough in the tariffs spat between the world's top two economies.

After three days of talks in Beijing, Chinese officials said negotiators had "laid the groundwork" to resolve their differences. Trump earlier this week tweeted his optimism a deal could be struck at some point. "This outcome is very much in line with broader expectations given this was a preliminary mid-level US and Chinese trade representatives affair possibly setting up for a more significant announcement in Davos when President Trump takes the grand stage" said Stephen Innes, head of Asia-Pacific trade at OANDA.

Oil prices were also lower Thursday, having surged around five per cent Wednesday in response to confirmation from Saudi Arabia that it would slash exports of the black gold after an agreement between OPEC and other top producers such as Russia late last year. Both main contracts have rallied by more than a fifth since late December, before which they had dived more than 40 per cent since October on supply and demand worries.

"Confidence in reduced Saudi, Russia and other OPEC+ member shipments, the positive trade vibes and a weaker US dollar are all contributing to the rebound," said National Australia Bank strategist Ray Attrill. Dealers are keeping tabs on developments in Washington after talks to end the US government shutdown broke down when Trump stormed out after Democrats told him they would not fund his Mexican border wall.

He later described the talks with congressional leaders as "a total waste of time", meaning several parts of the government remain unfunded with hundreds of thousands of workers at home unpaid and no sign of an end to the impasse.