The dollar fell to its lowest level in seven weeks against the yen on Tuesday as recent weak U.S. economic data was seen limiting the scope for a near-term rate hike, while oil prices extended their gains to the highest levels in over five weeks.

European shares retreated from 7-week highs, weighed down by industrial stocks, with markets in London, Paris and Frankfurt down 0.4-0.9% while U.S. stock futures traded lower ahead of U.S. data later in the day.

The spotlight was on currency markets, where the dollar fell more than 1% to below 100 yen. The dollar index, which measures the U.S. currency against six of its peers, slipped to a seven-week low of 94.616.

The greenback has been under pressure for the past week as the perceived chances of a rise in U.S. interest rates this year took a knock from weak data and the tone of some Federal Reserve policymakers. 

A trigger for overnight weakness was a regional economic letter from San Francisco Fed President John Williams arguing that central banks might have to raise inflation targets, focus more on growth and back much looser fiscal policy in future.

A perception that the Bank of Japan could be running out of room for maneuver in terms of monetary stimulus, meanwhile, has boosted the yen. 

"There are two angles here. Firstly, it is the failure of the QE policy over in Japan, and expectations are that perhaps focus will be more on fiscal stimulating policies rather than monetary policies," said Naeem Aslam, chief market analyst at Think Markets UK. "Finally, the fading interest rate hike expectations are taking the steam out of the dollar."

Inflation, housing starts and industrial output data later in the day could provide more clues on the U.S. rate outlook.

Minutes from the Fed's July policy meeting, due on Wednesday, are also in focus.

Although Fed officials have said a rate hike is possible by the end of 2016, investors are not convinced the Fed can raise rates this year given the fragile global economic outlook. 

Most other countries are easing monetary policy. Britain, Australia and New Zealand have cut rates in recent weeks and Japan has stepped up its purchases of exchange-traded funds.

STOCKS OFF HIGHS

Asian shares rose to a one-year peak, lifted by a rise in U.S. stocks to record highs a day earlier and expectations that monetary policy around the world will remain lower for longer than anticipated to support growth. 

Monetary easing by central banks and a rebound in oil prices have bolstered world stocks, with markets in the U.S., Europe and Asia outside Japan up roughly 10% since late June. 

But, in a sign that the rally in world shares is losing momentum, Chinese stocks pulled back from seven-month highs following a sharp correction in bank shares  and Japan's Nikkei fell more than 1.5% to its lowest level in just over a week as the yen firmed. 

"Equity markets are looking a bit frothy and what's dragging them down is a bit of softness in the oil price and yen strength," said Michael Hewson, chief market analyst at CMC Markets. "Investors are a bit nervous but ultimately in a low-yield world, stocks remain a decent bet for yield."

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets 

Indeed, a bull run in emerging markets stocks thundered on as Russian shares touched new record highs, helped by the rally in oil prices.

Oil prices reached their highest levels in more than five weeks as the market rode optimism over potential producer action to curb output.

Brent crude futures touched $48.74 per barrel, their highest point since July 7, while U.S. West Texas Intermediate crude reached $46.16 per barrel, their highest since July 15, before easing to $45.98, up 24 cents from the previous close.

There were some positive signs from Germany, where a survey showed the mood among German analysts and investors improved slightly in August, regaining some ground after a slump last month following June's Brexit vote.

Sterling, meanwhile, slightly strengthened against the dollar after slightly higher than expected inflation data from Britain.

But against a firmer euro, sterling fell for a seventh straight day in its worst run since mid-2013.