A retreat in oil prices and signs of improved confidence in the US financial sector pushed the dollar to a one-month high against the yen.

Adding to a sense of short-term relief, US President George W. Bush dropped a threat to veto a housing-bailout bill that would extend a lifeline to the embattled mortgage lenders Fannie Mae and Freddie Mac.

The drop in oil and the potential housing rescue together have stopped cold a popular trade in which dealers would simultaneously bet against the financial sector and put their money in the energy sector. The unwinding of this trade has accelerated the upward momentum in equities.

However, uncertainty loomed as to whether economics were supporting the global stock market rally, particularly after data showed Japanese exports fell for the first time in five years.

"There's certainly some relief now regarding Freddie Mac and Fannie Mae, but this is mainly just over the short term," said Yutaka Miura, a senior technical analyst at Shinko Securities in Tokyo. "A comprehensive solution hasn't yet been found, and this will lead to uncertainty over the longer term."

Japan's Nikkei share average rose about 1.3 per cent to its highest level since July 2, led by sectors most sensitive to fuel prices, such as automakers.

Shares in the Asia-Pacific region excluding Japan edged up 0.6 per cent on the day to the highest level in more than three weeks, having climbed almost 8 per cent from a 16-month low plumbed last week.

South Korea's KOSPI jumped 2 per cent, led by shares of Samsung Electronics Ltd, which is due to report results on Friday.

Crude prices were trading around $124.30 a barrel, more than $22 below the all-time high hit two weeks ago. A US government report overnight showed a large buildup in oil supplies, reinforcing concerns that energy demand is deteriorating under the weight of an economic slowdown and high prices.

Lower oil prices have pushed up the US dollar, which has also benefitted recently from comments from Federal Reserve officials suggesting interest rate increases are needed sooner rather than later to quell inflation.

The dollar hit a one-month high against the yen just below 108 yen. The euro was at $1.5680, falling further from its record high above $1.60 reached last week.

"The outlook for the dollar is intertwined with oil prices," said Ashley Davies, currency strategist with UBS in Singapore. "The recent weakness in oil could be the result of declining demand and as such could be more than a dip or at least a very long, drawn out dip," he said in a note.

Strength in equity markets continues to pull capital out of major government bond markets, often a place where investors stash money in times of high volatility.

Japanese government bonds slid for a third straight day, though the Japanese trade data curbed deeper losses. The benchmark 10-year yield, which moves inversely to the price, rose 2.5 basis points to 1.665 per cent, having climbed from a three-month trough of 1.530 per cent last week.

Activity was subdued as investors were cautious ahead of the Ministry of Finance's 800 billion yen ($7.4 billion) auction of 20-year bonds later in the day.