(Updated prices at 0530 GMT)

By Stella Qiu

SYDNEY, May 28 (Reuters) - Asian shares edged higher on

Tuesday while the dollar remained on the backfoot for a third

straight session, as heightened expectations of an imminent

European rate cut helped whet risk appetite.

Gains were limited ahead of key inflation readings this

week.

Europe is set for a slightly stronger open, with EUROSTOXX

50 futures up 0.2%. That would build on gains overnight

after a slew of European Central Bank officials said the ECB has

room to lower interest rates as inflation slows.

With debate now shifting to subsequent moves, markets have

fully priced in two rate cuts by October this year.

. That in turn guided Wall Street stock futures

higher ahead of the reopening of U.S. markets after a public

holiday.

S&P 500 futures rose 0.1% and Nasdaq futures

gained 0.2%.

MSCI's broadest index of Asia-Pacific shares outside Japan

rose 0.2% after a 0.9% increase on Monday.

Taiwanese shares climbed 0.5% to a record high, while

Hong Kong's Hang Seng index trimmed some earlier gains to

be up 0.1%.

Japan's Nikkei, on the other hand, slipped 0.2%,

reversing some of a 0.7% advance a day ago.

"We're heading into the northern hemisphere summer season.

Traditionally that's a time when markets just tend to get in

that drift mode," said Tony Sycamore, an analyst at IG.

Sycamore believes the Hang Seng has further to run higher

after a recent leg up, as data is likely to support further

improvements in the Chinese economy. China will release surveys

of manufacturing and services activity for May on Friday.

"I like the idea of getting back into that trade on

pullbacks and that's something where I think it's got further

upside whereas the Nikkei to me there are question marks now

hanging over that market."

He added that Nikkei has failed to get back to near its

record high in March and that there are signs that market

participants are starting to take money out of the benchmark to

invest in Chinese markets.

The big risk events this week are not due until Friday

when U.S. figures on core personal consumption expenditures

(PCE) - the Federal Reserve's preferred measure of inflation -

and eurozone inflation data will set the tone for trading.

In foreign exchange markets, the dollar was on the

back foot for a third straight session, last down 0.1% against

its major peers, as traders awaited the PCE release.

The median forecast for April is a 0.3% rise over the

previous month, while year-on-year expectations are for a 2.8%

climb, with risks on the downside.

The Japanese yen steadied at 156.78 per dollar,

just a touch stronger than the key 157 level. It, however, kept

weakening against a slew of high-yielding currencies, with the

New Zealand dollar hitting a fresh 17-year top of 96.56 yen

on Tuesday.

Thanks to the strong carry demand, the kiwi hit a

2-1/2-month high of $0.6155.

The cash Treasuries market returned from a holiday with

little movement after taking a hit last week.

Two-year yields fell 1.6 basis point to 4.9375%,

having surged 13 bps the previous week, while the 10-year yield

slipped 1 bp to 4.4610%, after rising 5 bps the

week before.

Oil prices extended gains from the previous session. Brent

futures rose 0.2% to $83.23 a barrel. U.S. crude futures

for July were at $78.84 a barrel, up 1.4% from Friday's

close, having traded through the U.S. holiday.

Gold prices climbed for a third day, up 0.1% at

$2,352.20 per ounce.