GLOBAL MARKETS-Japanese stocks fall, dollar hemmed in near 2-yr low vs euro

Reuters

* Seoul shares drop 0.5 pct, Tokyo's Nikkei down 0.9 pct

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

By Dominic Lau

TOKYO, Oct 25 (Reuters) - A stronger yen depressed Japanesestocks on Friday, while the dollar was hemmed in near a two-yearlow against the euro, reflecting expectations the U.S. FederalReserve will continue its stimulus into 2014.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1 percent, reversing earlier slightgains. The index fell 0.1 percent on Thursday as rising Chinesemoney-market rates countered signs of a pick-up inmanufacturing.

South Korean stocks dropped 0.5 percent.

In Tokyo, the Nikkei share average shed 0.9 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 missed market expectations, according to ThomsonReuters StarMine. That compared with 42 percent in the previousquarter.

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 $1.3788, 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."

Against the yen, the dollar stood at 97.255 yen, 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 0.1 percent toabout $97.2 a barrel, moving away from a 3-1/2 month low of$95.95 touched in the previous session.

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