By Lisa Twaronite
TOKYO (Reuters) - Asian stocks shook off their gains and headed south on Friday, as unrest in Ukraine offset comforting words from U.S. Federal Reserve Chair Janet Yellen that markets took as confidence in the U.S. economy.
The fear factor helped the yen rise against the dollar and euro on its traditional safe-haven appeal as tensions mounted in Ukraine, even after Yellen's testimony to a Senate committee helped the S&P 500 close at a record high.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 percent, though it was still on track for a modest weekly gain, while Tokyo's Nikkei stock average skidded 1.1 percent.
The ascendant yen battered exporter shares and cancelled out any lift from data showing Japanese factory output rose in January at the fastest pace in more than two years and core inflation stood close to a five-year high.
"Investors are avoiding risks as they are staying cautious about the situation in Ukraine and emerging markets' assets," said Hikaru Sato, a senior technical analyst at Daiwa Securities in Tokyo.
Hong Kong shares fell on Friday afternoon, with mainland markets also weaker, as investors cut their exposure in cyclical outperformers ahead of a manufacturing survey and a key China parliamentary meeting next week at which leaders are expected to stick to a cautious approach to reforms.
"As usual, expectations are running high for some kind of supportive policy, this time for state-owned enterprise reform, but this is a game we have played before. Not much detail usually gets released," said Jackson Wong, Tanrich Securities' vice-president for equity sales.
China's yuan is set for the biggest weekly loss on record, as the central bank stepped up its intervention to weaken the currency ahead of the key government meeting.
China's official manufacturing purchasing managers' index (PMI) for February is due on Saturday, after January showed a dip to an eight-month low.
UKRAINE INCREASINGLY UNSTABLE
Investors focused on the increasingly unstable situation in Ukraine. The United States told Russia to demonstrate in coming days that it was sincere about its promise not to intervene in Ukraine as armed men stormed the regional parliament and hours later others seized the airport in a mainly ethnic Russian region.
The unrest prompted investors to seek the safety of U.S. Treasuries, pushing yields to more than three-week lows in Asia where the yield on the 10-year note slipped to 2.638 percent, from its U.S. close of 2.642 on Thursday.
Yellen said on Thursday the Fed will continue to determine whether severe winter weather was behind recent signs of weakness, and reemphasised that it would take a "significant change" to the economic outlook to sway the Fed from its plans to taper its stimulus.
An unexpected rise in U.S. durable goods orders, excluding transportation, also helped U.S. sentiment.
The dollar's early gains against the yen unravelled, with the U.S. unit shedding about 0.5 percent to 101.64 yen, after dropping as low as 101.55 yen, its lowest since February 17.
"Isolated incidents from Ukraine will continue to move the dollar at least until elections are held there in May," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy in Tokyo.
"Any losses the dollar suffers against the yen will be temporary, however, as bargain hunters will be ready each time, supported by the notion that real military conflict will be unlikely," Yamamoto added.
The euro eased 0.1 percent on the day to $1.3695, though it held above the previous session's two-week low of $1.3641.
It also surrendered territory to the yen, losing 0.6 percent to 139.16, moving back in the direction of a more than two-week low of 138.75 yen touched on Thursday.
In commodities trading, gold prices were nearly flat with spot gold trading at $1,331.76, but it was on track for its fourth week of gains and biggest monthly gain since July.
Oil slipped, taking its cues from unrest in the Ukraine, with Brent crude down about 0.2 percent at $108.77 a barrel. U.S. oil was down 0.4 percent at $101.97, but it was still on track for a monthly gain of over 4 percent.
(Additional reporting by Ayai Tomisawa and Shinichi Saoshiro in Tokyo and Clement Tan in Hong Kong; Editing by Shri Navaratnam and Eric Meijer)
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