* China Q3 growth quickens to 7.8 pct yr/yr
* Asian shares up, Australian stocks hit 5-yr high
* Focus turns to Fed after government shutdown
* Euro hovers near 8-month high vs dollar
By Dominic Lau
TOKYO, Oct 18 (Reuters) - Australian stocks hit a five-yearhigh on Friday as Asian shares celebrated China's quickeninggrowth -- just a day after U.S. legislators finally broke aconfidence-sapping fiscal impasse.
As the U.S. debt drama faded, speculation grew over when theFederal Reserve would pare back its stimulus reduction drive -- supporting riskier assets but keeping the dollar pinned to aneight-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 economygrew 7.8 percent in the third quarter, its fastest pace thisyear and in line with expectations, as firmer foreign anddomestic demand lifted factory production and retailsales.
China's CSI300 index climbed 0.7 percent, whileAustralian shares jumped to their highest level sinceJune 2008 because Australia's exports are so closely linked toChina's fortunes.
"The Q3 GDP figure is in line with market expectations butthe uncertainty is whether the current recovery is sustainable,"said Shen Jianguang, chief China economist with MizuhoSecurities in Hong Kong.
Overnight, the U.S. Standard & Poor's 500 index closed at a record high. U.S. S&P E-mini futures added0.3 percent in Asian trade on Friday, indicating a further risewhen Wall Street opens later in the day.
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 economyback from the brink of an historic debt default, funds thegovernment until Jan. 15 and raises the borrowing limit throughto Feb. 7.
Analysts said economic weakness resulting from the 16-dayshutdown and uncertainty over the next round of budget and debtnegotiations may keep the Fed from withdrawing monetary stimulusuntil at least a few months into next year.
A simple estimate suggested the direct and indirect impactof the shutdown would weigh on the annualised fourth-quartergross domestic product growth by 0.4 percentage point, MorganStanley said.
In September, the Fed stunned markets by opting to delaytrimming its $85 billion-a-month bond purchases. Stimulustapering expectations have now been pushed back to December.
"The U.S. dollar is the worst-performing currency asattention shifts from the U.S. debt debacle to incoming Fedrhetoric, and bond markets may be leading the way," saidChristopher Vecchio, currency analyst at DailyFX.
"The U.S. Treasury yield curve continues to flatten, whichtypically occurs when either slower economic growth is expectedand/or additional monetary easing is forecasted," he added.
Yields on benchmark 10-year U.S. Treasuries hita two-week low on Thursday at 2.581 percent. They were quoted at2.595 percent in the Asian session. Prices rise as yields fall.
The dollar held steady at 98.04 yen after shedding0.8 percent against the Japanese currency overnight to log itsbiggest one-day percentage drop in a month.
As the yen firmed, Tokyo's Nikkei average slipped0.2 percent, on track to end a seven-day winning streak -- itslongest 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-monthtrough on Thursday.
"The Fed's taper decision will ultimately be tied to theeconomic data -- which have been hard to come by since thegovernment shutdown," analysts at Barclays Capital said in anote.
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 nextTuesday. The report was originally scheduled for release on Oct.4.
Among commodities, gold took a breather afterrallying almost 3 percent overnight -- its biggest one-day risein a month -- as the dollar weakened. It was down 0.2 percent atabout $1,316 an ounce, though not far from a more than one-weekhigh reached on Thursday.
U.S. crude prices rose 0.3 percent to just below $101a barrel after having fallen to their lowest level in more thanthree months in the previous session as stockpiles at oil hubCushing began to reverse a months-long decline, and as signs ofprogress in talks over Iran's nuclear programme also pressuredprices.
- Budget, Tax & Economy
- government shutdown