HONG KONG ? Asian stocks followed Wall Street lower on Friday as concerns over the global economy returned, while China set the yuan at its strongest rate in five years a day before a key G20 summit.

Traders extended losses from the previous session after the US Federal Reserve issued a subdued outlook on the state of the world's biggest economy, suggesting the European debt crisis was taking its toll.

Tokyo dropped 1.45 percent, Hong Kong was 0.40 percent lower and Singapore fell 0.27 percent while Shanghai shed 0.13 percent.

Sydney gave up 1.14 percent as hopes subsided that new Prime Minister Julia Gillard would soften a controversial resources tax.

And Taipei fell 0.70 percent after the government raised interest rates for the first time since the global downturn and despite officials agreeing a free trade deal with China.

On Wall Street, the Dow Jones index tumbled 1.41 percent as investors digested the Fed's comments after a two-day policy meeting that ended Wednesday.

After keeping interest rates at record lows the central bank warned that "financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad".

The debt woes of eurozone countries including Greece and Spain have caused concern globally that the problems could spill over and lead to another downturn.

The Fed's assessment follows a batch of poor homes sales data that suggests recovery in the US is not as strong as hoped.

The People's Bank of China said Friday it set the central parity rate ? the center point of the currency's allowed trading band ? at 6.7896 to the dollar, 0.3 percent stronger than Thursday's 6.8100.

The figure marks the strongest the yuan has been since China freed it from an 11-year-old peg in July 2005 and moved to a tightly managed floating exchange rate.

In early trading, the yuan weakened slightly to 6.7900 on China's main foreign exchange market.

Beijing at last weekend pledged to let the yuan trade more freely against the dollar but ruled out dramatic moves or a one-off appreciation.

The announcement comes as President Hu Jintao prepares to join other world leaders in Toronto for the Group of 20 summit, where he had been expected to face pressure to let his currency strengthen.

Many critics argue that China has kept its currency artificially high in order to help its exports. The yuan had been effectively pegged to 6.8 to the dollar since the global economic crisis erupted in 2008.

Despite China's action, US lawmakers have threatened to press ahead with legislation they said would treat "currency manipulation" as an illegal subsidy and enable US authorities to impose tariffs on Chinese goods.

The falling stocks led to more risk aversion, which weighed on the euro. The single currency was changing hands at $1.2322 in Tokyo morning trade, a shade lower than 1.2328 in New York late Thursday. It slipped to 110.41 yen from 110.47 yen.

The dollar was trading at 89.67 yen, hardly changed from New York.

Oil was higher, with New York's main contract light sweet crude for August delivery up 17 cents to $76.68 a barrel and Brent North Sea crude for August delivery gaining 19 cents to $76.66.

Gold opened at 1,243.00-1,244.00 US dollars an ounce in Hong Kong, up from Thursday's close of $1,231.50-$1,232.50.