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 Asian stocks traded tentatively on Tuesday, while the dollar lurked near a five-month low as cooling U.S. inflation bolstered bets the Federal Reserve would cut interest rates soon.

Investors were still digesting data released on Friday that showed U.S. prices fell in November for the first time in more than 3-1/2 years, underscoring the economy's durability.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.18% higher, on course for a 1.6% gain this year. Japan's Nikkei eased 0.07% but remains the best performing Asian stock market with a 27% gain for the year.

Trading is likely to be thin on the day after Christmas with several markets, including those in Australia, New Zealand and Hong Kong closed for the Boxing Day holiday.

Stock investors have cheered recent signs from the Fed on the outlook for rates. At the conclusion of its policy meeting on Dec. 13, the Fed signalled that it had reached the end of its tightening cycle and opened the door to interest rate cuts in the coming year.

"The Federal Reserve has aggressively changed its rhetoric to engineer a significant easing of financial conditions," Citi analysts said in a note.

"A combination of slower core inflation and rising recession concerns led Fed officials to shift rhetoric away from a commitment to fight inflation with higher-for-longer rates and toward reassuring markets that they will not 'hang on' to higher rates for too long."

Markets are now pricing in a 75% chance of a 25 basis points rate cut from the Fed in March, according to the CME FedWatch tool, compared with a 21% chance at the end of November. Markets are also pricing in more than 150 basis points of rate cuts next year.

In Asia, China stocks eased 0.12% in early trading, with online gaming companies still reeling from new rules to curb spending on video games, while Hong Kong's Hang Seng Index remained closed.

In the currency market, moves were muted in holiday-thinned trade, with the dollar index at 101.65, not far from the five-month low of 101.42 it touched on Friday. The index is down 1.8% for the year, on course to snap its two-year winning run.

The yen meanwhile was steady at 142.30 per dollar. The prospect of the Bank of Japan (BOJ) soon ending its ultra-easy policy has helped lift the currency in recent weeks.

The Asian currency is up 4% this month, on course for second straight month of gains against the dollar. But for the year, the yen remains down 7.8% against the greenback.

Bank of Japan Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank's inflation target was "gradually rising" and it would consider changing policy if prospects of sustainably achieving the 2% target increase "sufficiently".

In commodities, U.S. crude rose 0.1% to $73.63 per barrel and Brent was at $79.06, down 0.42% on the day in light trading as investors kept a watchful eye on tensions in the Middle East after Houthi attacks on ships disrupted global shipping and trade. [O/R]

Spot gold added 0.5% to $2,063.89 an ounce. [GOL/]