* Seoul shares drop 1 pct, Tokyo's Nikkei down 1.2 pct
* Dollar near 2-year low vs euro, 2-week low vs yen
* Aussie, kiwi dollars weak, Indonesia's rupiah rises
By Dominic Lau and Vidya Ranganathan
TOKYO, Oct 25 (Reuters) - A stronger yen depressed Japanesestocks on Friday, while the dollar was hemmed in near a two-yearlow against the euro by expectations the U.S. Federal Reservewill continue its monetary stimulus well into 2014.
Those expectations were tempered, however, by continuedworries over tighter cash markets in China, leading to alopsided and selective rally in Asian markets.
The Indonesian rupiah rallied more than 1.5 percentagainst the weak dollar, but the Aussie was on thebackfoot.
Korean stock markets fell as investors braced forsome profit-taking in a market that has seen record foreignbuying for 40 consecutive sessions and has pushed the won to a two-year high this week.
The KOSPI index was down 1 percent even after SamsungElectronics Co Ltd, the index's largest component,said its quarterly operating profit surged 26 percent to a newrecord.
"A combination of foreign outflows and shadows of Chinaliquidity concerns are dragging on the market," said LeeKyung-soo, an analyst at Shinyoung Securities.
MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.3 percent, reversing earlier slightgains. The index fell 0.1 percent on Thursday as rising Chinesemoney market rates countered signs of a pick-up inmanufacturing.
In Tokyo, the Nikkei share average shed 1.2 percentas the dollar languished near a two-week low against the yen. Itwas on track to suffer its first weekly drop in three weeks.
Although the Japanese quarterly earnings season is still atan early stage, 70 percent of the 10 Nikkei companies that havereported so far have missed market expectations, according toThomson Reuters StarMine. That compared with 42 percent in theprevious quarter.
U.S. S&P E-mini futures were flat in early trade. The S&P 500 index had advanced 0.3 percent on solid earningsand expectations that monetary stimulus will be in place for theforeseeable future after weak data.
U.S. manufacturing output fell for the first time in fouryears and the number of new claims for unemployment benefitsfell less than expected last week. .
The euro was steady at $1.3796, not far from atwo-year high of $1.3826 touched on Thursday and shrugging offdata showing the pace of growth in euro zone businessunexpectedly eased this month.
"The dollar will not rally without Fed tapering expectationsrising again, but we would not chase EUR/USD higher here, asrate compression suggests the pair is unlikely to break muchhigher," Societe Generale analysts wrote in a note, saying theyfavoured Scandinavian and Antipodean currencies into year-end.
"Fed tapering expectations being pushed out into 2014 andfurther ECB easing early next year suggest a favourable policyenvironment for the FX carry trade. Throw in lower volatilityand seasonality effects, and one has the perfect cocktail forthe carry trade."
Yet the Antipodeans, the Aussie and New Zealand dollars,were nursing broad losses too as investors quit extended longpositions in the two currencies.
The Aussie was settling around $0.9600, after touching a lowof $0.9582. It had hit a 4-1/2-month peak of $0.9758 onWednesday, but is on track for a loss of close to 1 percent forthe week.
The kiwi was holding just above a 10-day low at$0.8310. It had also peaked during the week at a multi-monthhigh, but now faces a weekly loss of more than 2 percent.
Risky assets had been hit by talk that China was tighteningcash supply to counter inflation risks and curb shadow banking,which led to a spike in short-term money market rates in China.
China's central bank, which sparked a market panic in Juneby engineering a cash crunch, refrained from taking part onThursday in scheduled money market operations for the thirdconsecutive time.
It has drained more than 157 billion yuan ($26 billion) frommoney markets since the week of Sept. 30. In response, China'sseven-day repurchase rate - a benchmark forshort-term funds - has jumped by 150 basis points this week tolevels around 5 percent.
"In our view, the talk of the Chinese tightening was a bitof a red herring. It coincided with, and perhaps offered anexcuse to take advantage of the long run up for theAntipodeans," said Westpac senior strategist Imre Speizer.
"For both, the broader story remains (U.S.) dollar weakness,and the high-beta currencies to perform well against it."
Against the yen, the dollar stood at 97.23, a shadeoff the two-week low of 97.15 yen hit on Wednesday.
The dollar index, which tracks a basket of majorcurrencies, was little changed.
Gold paused for breath after climbing 1.1 percent onThursday, while U.S. crude prices added 0.3 percent toabout $97.35 a barrel, moving away from a 3-1/2 month low of$95.95 touched in the previous session.
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