HONG KONG (Reuters) - Asian stocks are set to start Wednesday trade on a tentative note with markets put on edge by U.S President Donald Trump's abrupt dismissal of FBI Director James Comey and rising tensions over North Korea's nuclear program.
Rising U.S. yields propped up the dollar to its strongest level against the Japanese yen in two months at 114.32 in the previous session but it gave back some of those gains after Trump fired FBI Director Comey in a move that shocked Washington.
The dollar index, which tracks the greenback against a basket of six major currencies, slipped 0.2 percent to 99.437, moving away from a three-week high of 99.688.
It was last changing hands at 113.80 per dollar, while yields on benchmark 10-year U.S. Treasury notes were lurking near their highest levels since end-March at 2.41 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat after posting modest gains in the previous session. It hit a two-year high last week.
Korean stocks were among early gainers after South Korea's liberal leader Moon Jae-in was elected president.
But some market analysts pointed out with market volatility indicators hitting record lows -- the VIX indicator fell overnight to 9.56, its lowest since late 2006 -- the likelihood of a large move in financial markets has grown.
"Geopolitics and the divergence of policy have not gone away," Marc Chandler, global head of FX strategy wrote in a daily note.
"It is a reminder that we are often lulled into complacency just before being shocked by how treacherous things really are."
In the bond markets Fed funds futures pricing showed investors almost universally expect the Federal Reserve to raise U.S. overnight interest rates at its next meeting, with close to a 90 percent perceived chance of an increase next month.
Brent crude futures were rose 0.5 percent to $48.98 per barrel.
Gold advanced modestly to $1222.50 ounce, breaking a two-week long losing streak.
(Reporting by Saikat Chatterjee; Editing by Eric Meijer)