By Shinichi Saoshiro
TOKYO (Reuters) - Stock market gains were capped on Thursday in much of Asia in the wake of China's downbeat factory activity data, but shares in Shanghai focused on the potential positives from the weak reading and rallied.
The dollar held on to broad gains after minutes from the Federal Reserve's April meeting contained no major surprises.
Spreadbetters forecast a slightly lower open for Britain's FTSE, Germany's DAX and France's CAC, in light of subdued Asian stocks and a lack of clear leads from Wall Street.
MSCI's broadest index of Asia-Pacific shares outside Japan stood little changed. South Korean, Hong Kong and Malaysian shares slipped, while Australian stocks surged on bargain hunting. Tokyo's Nikkei initially set a new 15-year high but pared much of its gains on profit-taking.
The Shanghai Composite Index was up 1.2 percent after the flash HSBC manufacturing PMI showed Chinese factory activity contracting for the third month in May.
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Weak Chinese readings feed concerns about cooling demand from the global powerhouse, but at the same time they often shore up Chinese stocks by fuelling expectations that policymakers will roll out extra monetary stimulus.
"Under the current environment, any excuse seems good enough to cause a rally," wrote Gerry Alfonso, director of Shenwan Hongyuan Securities Co in Shanghai.
The closely watched Fed meeting minutes released overnight showed many officials believed it would be premature to hike interest rates in June, which did not take the markets by surprise.
The U.S. economy has shown signs of strength, the latest being this week's upbeat housing data, but overall recovery has not been as robust as expected. The economy grew by a modest 0.2 percent in the first quarter.
"A 'few' participants anticipated that the economy could make enough progress toward the dual mandate (of full employment and stable prices) to warrant a June rate hike, although 'many' thought it unlikely that the data available by the June FOMC meeting would justify a hike. We maintain our view of a first hike in September," strategists at Barclays said.
Before falling overnight on the Fed minutes, Treasury yields spiked earlier in the month along with a rout in euro zone bonds.
The surge in euro zone bond yields stalled this week, partly in response to European Central Bank policymakers saying the central bank would ramp up its bond buying.
The dollar fetched 121.075 yen, not too far from a two-month peak of 121.49 struck overnight. The euro hovered near a two-week low of $1.1062, having slid from a three-month peak of $1.1468 touched late last week.
The Australian dollar rose 0.4 percent to $0.7904 , putting on some distance from a two-week trough of $0.7861. A sharp drop in prices of iron ore, Australia's main export commodity, has weighed on the Aussie.
In commodities, U.S. crude rose 17 cents to $59.15 a barrel as a rebound following days of losses continued. Oil prices had bounced on Wednesday after a five-day decline, but a large supply overhang and concerns over a strong dollar capped gains.
(Additional reporting by Samuel Shen and Pete Sweeney in Shanghai; Editing by Eric Meijer, Kim Coghill and Clarence Fernandez)