Yen extends gains, Asian markets pause

SINGAPORE, Sep 5 (Reuters) The yen extended gains on Tuesday, riding to a two-week high against the dollar on economic optimism, while trading on Asia's stock markets was muted after the Labor Day holiday in the United States.

Oil prices steadied after their recent fall, which came as fears eased over OPEC producer Iran's nuclear ambitions.

The Japanese currency rallied after Monday's strong data on capital spending prompted a market which was heavily short of the yen to buy it back. Data showed short positions in the yen were at a record high last week.

''Repositioning in the yen is driving the currency's gains, but I'm not sure how long the rally is going to last,'' said Hiroshi Yoshida, forex dealer at Shinkin Central Bank.

The dollar traded around 115.90 yen at 0240 GMT, while the euro was trading at 148.83 yen.

After hitting a near four-month high on Monday, Japan's Nikkei fell 0.37 percent, as investors took profits on Honda Motor Co. and other blue-chip exporters on the stronger yen.

After drifting in and out of positive territory, the index ended the morning session down 61.17 points at 16,296.90, while MSCI's broadest index of shares elsewhere in Asia was up 0.1 percent at 0219 GMT.

MARKETS FALL South Korean shares, which had also touched their highest levels since May, also endured a topsy-turvy morning. At 0244 GMT the benchmark Korea Composite Stock Price Index (KOSPI) was down 0.05 percent.

But Lee Woo-hyun, an analyst at Kyobo Securities, said he expected the KOSPI to resume gains this month amid expectations the U.S. economy will avoid a hard landing.

''U.S. markets and global markets have risen to due to easing worries about a slowdown in the (U.S.) economy,'' he said. ''Those factors could continue to drive up the markets in September.'' Hong Kong's benchmark index was also trading down as investors there took a breather following a five-day gaining streak that drove the market above the 17,500 level.

Australian shares bucked the trend, rising 0.38 percent to a 3-{ month high, as the world's top miner BHP Billiton Ltd./Plc. got a boost from strong copper prices and insurance broker OAMPS jumped on a takeover bid.

OAMPS jumped 17.1 percent after diversified industrial company Wesfarmers Ltd. made an agreed A0 million (3 million) cash offer. Wesfarmers added 1.5 percent to A.17.

Miners BHP Billiton and Rio Tinto Ltd./Plc. gained between 1.6-2.0 percent.

Transport sector stocks such as Qantas Airways Ltd. and Korean Air were boosted by oil's recent drop.

Oil prices fell more than a dollar to less than a barrel on Monday on expectations that any sanctions against oil producer Iran were some way off and would not necessarily disrupt export flows.

London Brent crude rose about 0.5 percent on Tuesday and was trading at .08 a barrel at 0240 GMT.

The benchmark 10-year Japanese government bond yield rose 2.5 basis points to 1.695 percent, almost 10 basis points above a six-month low of 1.6 percent hit on Friday.

Gold traded around 8 an ounce from 6.30/627.30 late in London.

REUTERS PB RK1015