* Nikkei up 1.3 pct, Asia ex-Japan MSCI flat
* China PMI points to stabilising economy
* Dollar barely above 7-week low on expectations of dovish Fed
* Japan tankan in line with expectations, no reaction in yen
* European shares seen rising slightly
By Hideyuki Sano
TOKYO, July 1 (Reuters) - Asian shares held near three-year highs on Tuesday on upbeat Chinese manufacturing data and expectations that U.S. monetary policy will stay loose for some time, while the dollar was broadly soft.
Japan’s Nikkei rose 1.3 percent while the MSCI’s broadest index of ex-Japan Asia-Pacific shares was flat, staying just under a three-year high hit three weeks ago. Hong Kong markets were closed for a holiday.
European shares are expected to rise, with Britain’s FTSE seen advancing up to 0.2 percent and Germany’s DAX 0.1 percent.
China’s official Purchasing Managers’ Index showed factory growth rose to a six-month high in June, as expected, and a similar private survey also showed strong activity, reinforcing signs of stabilisation in the economy.
A string of fairly upbeat but relatively minor U.S. economic data published on Monday on the other hand did little to weaken expectations, rekindled after surprisingly weak first quarter growth data, that the U.S. Federal Reserve will keep an easy monetary policy for some time.
A leading indicator of U.S. home sales jumped to an eight-month high in May while a gauge of factory activity in the Midwest eased slightly from a seven-month high.
“Fed Chairwoman Janet Yellen has shown concerns about the softness in the labour market. So we expect the Fed to maintain a policy aimed at supporting growth,” said Takuro Nishida, deputy manager of investment planning at Sompo Japan Nipponkoa Insurance.
San Francisco Fed President John Williams said on Monday the U.S. central bank will probably need to keep interest rates near zero for at least another year, even as he expressed optimism the economy is on a recovery path.
While this Thursday’s U.S. employment report has potential to change that perception, investors for now are counting on an easy policy stance by the Fed, which undermines the currency’s yield attraction and puts pressure on the dollar.
The dollar index hit a seven-week low of 79.759 on Monday and stood barely above that level at 79.840.
As the dollar wilted, the euro rose to six-week high of $1.3698 on Monday and last traded at $1.3687, though the common currency is facing resistance at $1.37.
The yen also hit a six-week high of 101.235 to the dollar the previous day before easing slightly to 101.43 yen to the dollar. It showed no reaction to mixed readings in the Bank of Japan’s tankan corporate survey.
The Australian dollar gained 0.3 percent to $0.9453 , just shy of its year-to-date peak of $0.9461 hit in April, after the Australian central bank held back from efforts to talk down the strong currency after a policy meeting.
Gold hit a 2 1/2-month high of $1,332.10 per ounce and last stood at $1,327.80, helped by the dollar’s weakness as well as heightened geopolitical tensions.
Some market players said geopolitical concerns may be casting a shadow on risk sentiment, as the civil war in Iraq appeared to be deepening after a Sunni military leader was declared as caliph of a new Islamic state in lands seized across a swath of Iraq and Syria.
While the news had little immediate impact on many financial markets, some players think there could be huge repercussions because the development could destabilise the oil-rich Middle East.
“The U.S. employment growth has been pretty strong in the past several months so it makes me wonder why markets focused on such an old GDP data. I suspect that geopolitical concerns are also making investors cautious,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
Ukrainian President Petro Poroshenko said on Tuesday that government forces would renew offensive operations against pro-Russian rebels and “free our lands”, hours after a ceasefire to make way for peace talks with the rebels expired.
Still, oil prices eased from nine-month highs hit last month as government forces appeared to be keeping Sunni militants away from major refineries in Iraq.
U.S. crude futures traded at $105.72 per barrel, up 0.3 percent from late U.S. levels but off high of $107.73 hit less than two weeks ago. (Editing by Richard Borsuk & Kim Coghill)