Asian shares, dollar tread cautiously ahead of Fed meeting

TOKYO (Reuters) - Asian shares were modestly higher while the dollar held steady on Tuesday, as investors awaited the outcome of the U.S. Federal Reserve's two-day meeting that begins later in the session for clues to the direction of U.S. interest rates.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> shrugged off early losses and a lackluster performance on Wall Street to rise about 0.3 percent.

But Japan's Nikkei stock average <.N225> extended losses, shedding 0.8 percent on concerns over corporate earnings after disappointing results from Canon Inc <7751.T>, despite upbeat economic data released before the market open.

Japanese retail sales in September rose 2.3 percent from a year earlier, government data showed, suggesting consumer spending is gradually picking up.

"Positive retail data is helping some retail stocks, but not strong enough to affect the whole market as investors are focused on the big overseas event now," said Takuya Takahashi, a strategist at Daiwa Securities.

The Fed is expected to announce the completion of its quantitative easing program and will likely reinforce its stated willingness to wait a long while before hiking interest rates after a volatile month in financial markets. "With the end of the asset purchase program a foregone conclusion, speculation is once again mounting about the movement of interest rates," said Evan Lucas, market strategist at IG.

Data on Monday showed U.S. services sector activity slowed in October to a six-month low, while manufacturing output in Texas decreased, providing more evidence that the Fed has reason to wait before raising U.S. interest rates.

The U.S. dollar steadied after slipping overnight on expectations of more dovish comments from the Fed.

The dollar index , which tracks the U.S. unit against six major rivals, was steady at 85.502.

The dollar was flat on the day against its Japanese counterpart at 107.81 yen , but remained below Monday's nearly three-week high of 108.38.

The greenback inched up about 0.1 percent against the euro to $1.2711 .

Germany's closely watched Ifo report of business sentiment on Monday showed the index hit its lowest level in almost two years in October, indicating that Europe's largest economy faces challenges.

U.S. crude for December was down about 0.5 percent at $80.59 per barrel after dropping as low as $79.44 on Monday, its lowest level since June 2012, after Goldman Sachs cut its price forecasts. Concerns about weak global demand and booming supply continued to loom over the market.

Spot gold recouped earlier losses to rise 0.2 percent to $1,228.60, pulling away from two-week lows.

(Additional reporting by Ian Chua in Sydney and Ayai Tomisawa in Tokyo; Editing by Jacqueline Wong)

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