By Dominic Lau
TOKYO (Reuters) - Australian stocks hit a five-year high on Friday as Asian shares celebrated China's quickening growth -- just a day after U.S. legislators finally broke a confidence-sapping fiscal impasse.
As the U.S. debt drama faded, speculation grew over when the Federal Reserve would pare back its stimulus reduction drive -- supporting riskier assets but keeping the dollar pinned to an eight-month low.
MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.7 percent to a five-month high, adding to Thursday' 0.6 percent rise.
Investors were relieved when data showed China's economy grew 7.8 percent in the third quarter, its fastest pace this year and in line with expectations, as firmer foreign and domestic demand lifted factory production and retail sales.
China's CSI300 index <.CSI300> climbed 0.7 percent, while Australian shares jumped to their highest level since June 2008 because Australia's exports are so closely linked to China's fortunes.
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"The Q3 GDP figure is in line with market expectations but the uncertainty is whether the current recovery is sustainable," said Shen Jianguang, chief China economist with Mizuho Securities in Hong Kong.
Overnight, the U.S. Standard & Poor's 500 index closed at a record high. U.S. S&P E-mini futures added 0.3 percent in Asian trade on Friday, indicating a further rise when Wall Street opens later in the day. <.N>
Financial bookmakers expected major European indexes to open up as much as 0.5 percent.
The U.S. budget deal, pulling the world's largest economy back from the brink of an historic debt default, funds the government until January 15 and raises the borrowing limit through to February 7.
Analysts said economic weakness resulting from the 16-day shutdown and uncertainty over the next round of budget and debt negotiations may keep the Fed from withdrawing monetary stimulus until at least a few months into next year.
A simple estimate suggested the direct and indirect impact of the shutdown would weigh on the annualised fourth-quarter gross domestic product growth by 0.4 percentage point, Morgan Stanley said.
In September, the Fed stunned markets by opting to delay trimming its $85 billion-a-month bond purchases. Stimulus tapering expectations have now been pushed back to December.
"The U.S. dollar is the worst-performing currency as attention shifts from the U.S. debt debacle to incoming Fed rhetoric, and bond markets may be leading the way," said Christopher Vecchio, currency analyst at DailyFX.
"The U.S. Treasury yield curve continues to flatten, which typically occurs when either slower economic growth is expected and/or additional monetary easing is forecasted," he added.
Yields on benchmark 10-year U.S. Treasuries hit a two-week low on Thursday at 2.581 percent. They were quoted at 2.595 percent in the Asian session. Prices rise as yields fall.
WOUNDED DOLLAR
The dollar held steady at 98.04 yen after shedding 0.8 percent against the Japanese currency overnight to log its biggest one-day percentage drop in a month.
As the yen firmed, Tokyo's Nikkei average slipped 0.2 percent, on track to end a seven-day winning streak -- its longest such run since March.
The greenback also lost more than 1 percent against the euro on Thursday, but was steady near an eight-month low at $1.36645 to the euro in Asian trade on Friday.
Against a basket of major currencies, the dollar ticked up 0.1 percent, stabilising after hitting an eight-month trough on Thursday.
"The Fed's taper decision will ultimately be tied to the economic data -- which have been hard to come by since the government shutdown," analysts at Barclays Capital said in a note.
In the coming week, investors will get a slew of U.S. economic data that had been delayed by the shutdown.
All eyes will be on the crucial nonfarm payrolls report next Tuesday. The report was originally scheduled for release on October 4.
Among commodities, gold took a breather after rallying almost 3 percent overnight -- its biggest one-day rise in a month -- as the dollar weakened. It was down 0.2 percent at about $1,316 an ounce, though not far from a more than one-week high reached on Thursday.
U.S. crude prices rose 0.3 percent to just below $101 a barrel after having fallen to their lowest level in more than three months in the previous session as stockpiles at oil hub Cushing began to reverse a months-long decline, and as signs of progress in talks over Iran's nuclear programme also pressured prices.
(Editing by Shri Navaratnam and Eric Meijer)