Easy Fed outlook, China growth send shares to five-year high, dollar to eight-month low

By Marc Jones

LONDON (Reuters) - Expectations the Federal Reserve will keep its stimulus in place for longer following the confidence-sapping U.S. fiscal impasse pushed world shares to a five-year high and the dollar to an eight-month low on Friday.

An acceleration in China's giant economy provided a further boost for stock markets, as well as growth-linked commodities such as oil and copper, as the prospect of an extended spell of super-easy money and improving growth buoyed investors. (.N)

European shares (.FTEU3) were up 0.3 percent around midday, with broadly even gains for most of the region's major bourses leaving them on course for a weekly gain of 1.75 percent and hovering at their highest since mid-2008.

That followed solid gains across most of Asia overnight.

Wall Street was expected to tick up 0.1-0.2 percent after Thursday's record close for the S&P 500 (.SPX).

As the U.S. debt drama faded, speculation grew over whether the likely hit to growth from the wrangling would see the Federal Reserve further delay cutting back its stimulus - supporting riskier assets but weighing on the dollar.

"The debate on the timing of QE tapering by the Fed is quickly moving to whether it will be Q1 2014 or Q2," said Derek Halpenny, European head of global markets research for Bank of Tokyo-Mitsubishi.

"The dollar has been left vulnerable by this uncertainty especially in circumstances of growth stabilizing in China."

Traders were continuing to sell the greenback versus a broad basket of currencies from both advanced and emerging economies.

The knock-on effect for Europe was a stronger euro and pound. The euro zone's shared currency hit an 8-1/2 month high of $1.3694 as its recent strong run following signs of a pick-up in the bloc continued.

"The euro itself has several factors that are certainly beneficial," said Vasileios Gkionakis, global head of FX Strategy for UniCredit. "The recovery is on track and next week we have the new PMI figures which should support that view."

"I think we are also seeing central banks looking to diversify some of their dollar holdings into euros and on top of that at the last ECB press conference Mario Draghi didn't show any real concern about the strength of the euro."

CHINA BULLS SHOP

Investors were also relieved by data showing 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 (.AXJO) jumped to their highest level since June 2008. Australian exports are closely linked to China's economic fortunes.

"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.

Though there was broad U.S. relief investors were retaining some caution following Wednesday's last-minute debt deal.

While it pulled the world's largest economy back from the brink of an historic default, it only funds the government until January 15 and raises the borrowing limit through to February 7, meaning another political showdown could be on cards.

Markets are also bracing for a deluge of delayed U.S. economic data over the next week.
A simple estimate suggested the direct and indirect impact of this month's shutdown would weigh on annualized fourth-quarter gross domestic product growth by 0.4 percentage point, analysts at Morgan Stanley wrote in a note to clients.

German Bunds were on course for a steady end to a week of hefty gains, while in the euro zone periphery only Portugal was in the red along with its main share market <.psi20> as its debt concerns continued.

Benchmark 10-year U.S. Treasuries were trading with a yield of 2.5504 percent ahead of the start of U.S. trading, a two-week low. Yields move inversely to prices.

In commodity markets, China's stronger growth helped copper climb 0.6 percent to 7,273 a tonne and Brent oil futures to hold above $109 a barrel after a build-up of crude stocks in the United States pushed oil prices down overnight.

Meanwhile, gold took a breather after rallying almost 3 percent overnight - its biggest one-day rise in a month - as the dollar weakened. It was steady at about $1,316 an ounce and not far off a more-than one-week high reached on Thursday.

(Editing by Catherine Evans)