(Updates prices as of 0530 GMT)

By Stella Qiu

SYDNEY, Oct 3 (Reuters) - Asian shares retreated from a

32-month peak on Thursday as the sizzling rally in Hong Kong

took a breather, while Japan's Nikkei jumped as the risk of

further tightening in monetary policy this year faded.

Sterling fell 0.7% to a two-week low of $1.3177 after Bank

of England Governor Andrew Bailey said the central bank could

become a "bit more aggressive" on rate cuts if inflation

continued to ease. FTSE futures narrowed earlier losses

and were last down 0.1%.

EUROSTOXX 50 futures still fell 0.5%. Nasdaq

futures dropped 0.3% and S&P futures slipped 0.2%.

Several Asian markets including South Korea, Taiwan and

mainland China are closed for the day. MSCI's broadest index of

Asia-Pacific shares outside Japan fell 1%

largely driven by a 1.6% drop in Hong Kong's Hang Seng index

.

That came after its meteoric rise of more than 30% over just

three weeks, fuelled by a flurry of Chinese stimulus measures to

revive a faltering economy.

The Nikkei outperformed with a jump of 2% as Japan's

newly elected Prime Minister Shigeru Ishiba said the country was

not ready for additional rate hikes, after meeting with the

central bank governor Kazuo Ueda.

Ueda also said the central bank would move cautiously in

deciding whether to raise rates.

That was followed on Thursday by dovish BOJ policymaker

Asahi Noguchi who said the bank must patiently maintain loose

monetary conditions.

The yen skidded 2% overnight before hitting a one-month low

of 147.24 per dollar on Thursday.

"Put together, I guess it is a comprehensive boost for the

dollar/yen because for me it has taken rate hikes off the table

for 2024... More likely we're talking about next tightening

isn't going to be until 2025," said Tony Sycamore, analyst at

IG.

"I think dollar/yen is going to be driven by the U.S. side

of the equation now. Given the fact we saw some good U.S. jobs

data this week - if that turns out to be case for non-farm

payrolls tomorrow - the dollar/yen can continue to ratchet up

higher towards 149.40 which we saw in mid-August."

Futures imply less than a 50% chance that the BOJ could hike

by 10 basis points by December, while rates are only seen

climbing to 0.5% by the end of next year, from the current

0.25%.

Overnight, Wall Street was mostly flat, though Treasury

yields rose after a strong private payrolls report added to

evidence of a healthy U.S labour market, lessening the risk of a

big downside miss for Friday's non-farm payrolls data.

Bonds this week have been supported by safe-haven flows as

geopolitical tensions in the Middle East ratcheted up. Israel

said eight of its soldiers were killed in combat in south

Lebanon as its forces thrust into its northern neighbour in a

campaign against the Hezbollah armed group.

Two-year Treasury yields were little changed at

3.652%, while ten year yields were flat at 3.792%.

Markets imply a 36% chance the Fed will cut by another 50

basis points in November, compared with almost 60% last week,

and have 70 basis points of easing priced in by year-end.

In the foreign exchange markets, the euro sagged at $1.1040,

just above key support at $1.10 and not far from Wednesday's low

of $1.10325, a level last seen on Sept. 12.

Markets ramped up bets that the European Central Bank will

cut rates at each of its meetings in October and December after

a top policy hawk Isabel Schnabel sounded more sanguine about

inflation coming under control.

Oil prices rose on worries the escalating Middle East

conflict could threaten oil supplies from the world's top

producing region. Brent futures rose 1.2% to $74.82 a

barrel.

Gold hovered near a record high at $2,652.75 an

ounce.