By Andrew Galbraith
SHANGHAI, June 29 (Reuters) - Asian share markets rallied from nine-month lows on Friday, after China eased foreign invesment limits, but underlying sentiment was dampened by worries over trade frictions a week before initial U.S. and Chinese tariffs were set to take effect.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was 1 percent higher, while Australian shares .AXJO were flat.
Japan's Nikkei stock index .N225 was down 0.3 percent, and South Korea's KOSPI .KS11 was down slightly.
After falling to fresh two-year lows on Thursday, shares in China rebounded Friday. While analysts said the jump reflected technical factors, it was helped by news that Beijing would ease foreign investment curbs on sectors including banking, automobiles, heavy industry and agriculture. country's central bank also said on Thursday that it would ensure that market liquidity remained "reasonably ample." blue-chip CSI300 index .CSI300 gained 1.5 percent, and the Shanghai Composite index .SSEC was 1.1 percent higher. Nevertheless, the CSI300 and Shanghai Composite are the world's two worst-performing major indexes this year, and are set for their worst monthly performances since January 2016.
Hong Kong's Hang Seng index .HSI rose 1.2 percent.
Despite the bump on Friday, analysts downplayed the impact of China's relaxing of investment curbs on broader trade issues.
"This may not be enough to ease current tensions, with the U.S. calling for much greater market access and fairer competition for foreign enterprises. The list affirms China's stance that opening up will occur in its own timeframe," Everbright Sun Hung Kai analysts said in a note.
Elsewhere in the region, investors remained focused on concerns over global trade, as the U.S. ambassador to China said Washington was not convinced that China is willing to make fast progress on trade. U.S. administration is due to activate U.S. tariffs on Chinese goods worth $34 billion on July 6, which is expected to prompt a tit-for-tat response from Beijing.
"The trade war issue is coming up to a critical junction because of that impending implementation of those tariffs," said Shane Oliver, chief economist and head of investment strategy at AMP Capital in Sydney.
While the scope of the initial tariffs is limited, "investors just worry that (tariffs are) going to lead to more retaliation and then escalation," he said.
The U.S. dollar index .DXY , which measures the greenback against a basket of six currencies, fell 0.5 percent to 94.914. The currency has risen in recent weeks, helped by the U.S. Federal Reserve's move to raise interest rates in June, and expectations of further hikes this year.
"The ongoing drip feed of high US interest rates is creating consternation," said Oliver. "Obviously it's pushing up the US dollar and putting downward pressure on Asian currencies generally, including the renminbi, and that could well have further to go."
The Chinese yuan CNY=CFXS traded as low as 6.6441 to the dollar on Friday, its lowest level since November.
The dollar was up 0.2 percent against the yen at 110.73 JPY= . The euro EUR= jumped after EU leaders reached an agreement on migration. The single currency was up 0.6 percent to $1.1635 at 0305 GMT.
The yield on benchmark 10-year Treasury notes US10YT=RR rose to 2.8547 percent compared with its U.S. close of 2.847 percent on Thursday.
The two-year yield US2YT=RR , which rises with traders' expectations of higher Fed fund rates, was at 2.5242 percent compared with a U.S. close of 2.52 percent.
Oil prices also came under pressure from trade frictions, falling despite tight crude market conditions that had pushed prices to three-and-a-half-year highs on Thursday. crude CLc1 dipped 0.4 percent to $73.16 a barrel. Brent crude LCOc1 was 0.3 percent lower at $77.65 per barrel.
Gold remained near six-month lows, weighed down by trade worries, interest rate expectations and the strong dollar.
On Friday, spot gold XAU= was trading slightly higher at $1248.71 per ounce, but was still headed for its worst monthly performance since November 2016. GOL/
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