Asian stock markets rose to three-month highs on Tuesday, extending a two-week rally fueled by strong U.S. economic data and a seeming thaw in U.S.-China tensions over the yuan.

The dollar held near 7-month highs against the yen, supported by a surge in U.S. Treasury yields, while the Australian dollar gained after the central bank raised interest rates by a quarter point, stoking expectations it will do the same next month.

European stocks <.FTEU3> were also set to rise as much as 0.8 percent after a long Eastern holiday weekend, following Asian and U.S. markets.

The MSCI Asia ex-Japan index <.MIAPJ0000PUS> rose half a percent on signs that a global recovery was gathering strength, with data on Monday showing the U.S. services sector expanded at its fastest pace in four years in March.

The services report and stronger-than-expected pending home sales pushed the Dow Jones Industrial average <.DJI> up 0.4 percent, just shy of the psychologically important 11,000 point mark. <.N>

Taiwan's stock market <.TWII> initially rose 1 percent and then paring gains, while Jakarta's <.JKSE> hit a fresh record high before also falling back.

But some of Asia's stock markets struggled to maintain momentum after having hit successive highs in the past week.

Japan's Nikkei average <.N225> fell 0.5 percent as traders took profits after successive days of 18-month highs, while South Korea's KOSPI <.KS11> ended little changed despite Samsung Electronics' <005930.KS> forecast of a record quarterly profit.

We have some short-term technicals suggesting the market is a bit overstretched, but any corrections will be more along the lines of a small breather and there's no change in the overall trend to buy, said Hiroichi Nishi, general manager at the equity division of Nikko Cordial Securities.

Still, the sluggishness in South Korean stocks even after Samsung rose to a fresh high suggested investors may have already priced in upbeat earnings estimates, which could limit further gains in coming months.

The tech-heavy KOSPI has risen 10 percent in the past two months. Samsung surged nearly 20 percent in recent weeks but closed down 0.1 percent on Tuesday.

At the same time, besides a gradual easing of concerns about European sovereign debt over the past few weeks, investors' appetite for riskier assets was boosted at the weekend by an announcement that the U.S. Treasury had delayed by at least three months its semi-annual report on currency policy.

That report, due on April 15, could have named China a currency manipulator, sparking trade frictions and more defiance from the Chinese authorities on the virtually pegged yuan.

The yuan firmed further in offshore forward markets on Tuesday, taking the implied appreciation in a year's time to just above 3 percent, as markets in Shanghai opened after a long weekend and roused speculation of a currency revaluation, albeit a small one.

China is more or less getting ready for a move in the currency. We think that move will happen in the next 4 to 5 weeks, said Mirza Baig, currency strategist with Deutsche Bank.

The kind of move might not be what the market expects. We think China might be moving toward allowing two-way fluctuations in the dollar/china exchange, instead of a purely one-way appreciation.

CURRENCIES

The dollar gained 0.35 percent against a basket of major currencies <.DXY> on Tuesday. It fell against the yen to near 94 while the euro slipped to $1.3420.

The Aussie dollar rallied around 45 pips to $0.9220 after the Reserve Bank of Australia delivered its fifth rate rise since October, particularly against the New Zealand dollar and euro.

Asian currencies rose on Monday and continued their gains on Tuesday, expecting that China will unleash the yuan from its peg within the three-month window given by the U.S. authorities.

Malaysia's ringgit, regarded as one of the best proxies for betting on the yuan, rose 0.4 percent to 3.2170 per dollar.

Analysts expect currencies and stocks in resource-rich Asian economies will benefit if and when a higher yuan makes it cheaper for China to import more.

Non-deliverable dollar/yuan forwards have fallen across the curve this week, with the one-year NDF hitting levels close to 6.62 yuan per dollar, its lowest since January.

Deutsche's Baig said he liked to be long Asian currencies generally because growth in the region was more robust than in the West.

As Beijing adjusts their policy, we may see more appreciation in other Asian currencies as well, he said.

U.S. Treasuries rose in Asia with dealers covering short positions in bond futures following a slide on Monday, when benchmark yields touched 4 percent for the first time in 10 months as the upbeat U.S. data pared safe-haven demand for bonds.

Oil slipped 10 cents to $86.53 per barrel as the dollar strengthened, pulling back from an 18-month high near $87 a day earlier on hopes U.S. economic growth is accelerating.

Oil prices rose more than 8 percent in the five sessions to Monday, their steepest 5-day winning streak this year and pushing up shares of energy companies worldwide. (Editing by Kim Coghill)

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