TOKYO, Oct 31 (Reuters) - Asian shares fell on Monday, taking a breather from a nearly 10 percent rally last week after Europe laid out a basic framework to tackle its debt crisis, but the euro held steady while the dollar dropped to a record low against the yen.
Investors were shifting their focus for now from Europe to key events such as the Federal Reserve's monetary policy meeting and U.S. economic data, including jobs, due later this week to gauge the state of the world's largest economy.
Despite easing equity markets, investors' appetite for some riskier assets remained, with Asian credit markets stabilising and easing demand for protection in the options market against losses.
The CBOE Volatility index VIX -- a 30-day risk forecast of volatility in the S&P 500 -- fell on Friday to its lowest in nearly two months.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2 percent on Monday, after posting its best week in nearly three years as a long-awaited plan to resolve the European debt crisis sparked a huge relief rally.
The Nikkei opened down 0.4 percent, weighed by the yen's persistent strength and worries about Japanese companies' earnings.
"The Nikkei ended at a two-month closing high on Friday, so it's difficult for the market to push it up too far, but it's unlikely that there will be a sell-off, either," said Yumi Nishimura, senior technical analyst at Daiwa Securities.
MSCI's all-country world stock index was up 0.5 percent late on Friday, after hitting its highest level in nearly three months and posting its best week since July 2009.
U.S. stocks ended mixed on Friday, closing out a fourth week of gains. October also was on track to be the best month for stocks since 1974, supported by strong earnings. Merck & Co Inc and Chevron Corp both topped expectations with financial results on Friday.
But a weak sale of Italian bonds on Friday underscored fragility of the euro zone's debt progress. The 10-year yield gap between Italian and German bonds widened after the auction to 378 basis points, about 10 bps wider on the day.
Italy paid record high cost of more than 6 percent to borrow on the debt market, in the first euro zone bond auction after policymakers struck an agreement on Thursday to slash Greece's debt burden and strengthen the European Financial Stability Facility, the region's rescue fund.
Details to implement the agreement remain unresolved, with one of the key issues being raising funds for the bailout vehicle.
The head of the EFSF played down hopes of a quick deal with China to throw its support behind efforts to resolve the crisis.
But a rise in riskier assets helped ease strains and stabilise Asian credit markets, with the spreads on the iTraxx Asia ex-Japan investment grade index , a gauge for whether investor risk appetite is returning, little changed early on Monday.
The euro held on to most of last week's gains against the dollar, but uncertainty about a possible interest rate cut on Thursday by the European Central Bank could limit its upside for now.
The single currency reached a seven-week high around $1.4247 last Thursday, and looked set to end the month up nearly 6 percent for its best monthly performance in just over a year.
Reuters
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