GLOBAL MARKETS-Asian stock markets fall, dollar near 2-yr low vs euro

Reuters

* Tokyo's Nikkei down 2.3 pct; seen pressuring Europe

* Dollar near 2-year low vs euro, 2-week low vs yen

* Aussie, kiwi dollars weak, Indonesia's rupiah surges

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 Nikkei share average's 2 percent drop was alsoset to pressure European markets on Friday, financial bookmakers predicted.

Financial spreadbetters were forecasting falls in Germanyand France as the region's equity indexes pause for breath afterhitting fresh highs this week. They expected Britain's FTSE 100 to open almost unchanged but Germany's DAX wasseen opening down by as much as 0.3 percent while France's CAC40 was seen falling 0.4 percent.

In Asia, the Indonesian rupiah rallied nearly 2percent against the weak dollar, but the Aussie was onthe back foot. Aussie shares rose 0.3 percent, endingnear the 5-year high of 5,402.4 hit earlier in the week.

Meanwhile, South Korean stock markets fell asinvestors braced for some profit-taking in a market that hasseen record foreign buying for 40 consecutive sessions and haspushed the won to a two-year high this week.

The KOSPI index was down 0.8 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 0.35 percent, reversing earlier slightgains. The index fell 0.1 percent on Thursday as rising Chinesemoney market rates countered signs of a pick-up inmanufacturing.

Shanghai shares hit their lowest levels in a month,while Tokyo's stock market was set to suffer its first weeklydrop 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. .

DOLLAR WEAKNESS

The euro was up 0.1 percent $1.3815, 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 $0.9605, 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.

Against the yen, the dollar stood at 97.09, a shade off 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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