European Markets Slump, Japan Shares Rally

The dollar edged higher against the yen and a rally in Tokyo stocks lifted world shares on Tuesday on signs of modest expansion in the United States and Japan, though the overall economic picture was mixed.

Japan's Nikkei index .N225 hit its highest level in nearly five weeks, driving gains in Asia, while Europeans share shed some of their recent gains in early trade, dipping 0.1 percent .FTEU3.

Monday's U.S., UK and Japanese surveys of manufacturing activity were upbeat, while Europe looked to be stabilizing. China and other big emerging markets, however, were showing signs of slowing.

Investors were also cautious ahead of Friday's U.S. payrolls report, seen as key to determining when the Federal Reserve will scale back the huge stimulus program that has underpinned demand for riskier assets.

"I think we can see a tentatively positive day, but we're certainly not running away with ourselves as so much is dependent on the U.S. employment picture," said Simon Smith, chief economist at FXPro.

The dollar edged back towards a four-week high against its Japanese counterpart at 99.78 yen though against a basket of major currencies it was little changed .DXY.

The Australian dollar stood out, weakening sharply after the nation's central bank kept its cash rate at a record low of 2.75 percent and reiterated that there could be room for further cuts.

In mixed fixed income markets, Spanish and Italian debt yields fell while Portuguese ones rose after the country's finance minister resigned.

(Editing by John Stonestreet)