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GLOBAL MARKETS-Dollar sags as Fed support, China growth lift shares

* Focus turns to Fed stimulus prospects after government


* China Q3 growth quickens to 7.8 pct yr/yr

* World shares at 5-year high; European, Asian stocks add to


* Euro hits 8-1/2-month high vs dollar

* Gold heads for best week in two months

By Marc Jones

LONDON, Oct 18 (Reuters) - Expectations the Federal Reserve

will keep its stimulus in place for longer following the

confidence-sapping U.S. fiscal stalemate 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 for commodities such as oil

and copper, as the prospect of an extended spell of super-easy

money and improving growth buoyed investors.

Wall Street was expected to add around 0.2 percent to

Thursday's record close for the S&P 500 when trading

reopens, with analysts already digesting results from two of its

big fish, General Electric and Morgan Stanley.

European shares had stretched their morning gains

to 0.4 percent, with broadly even climbs for most of the

region's major bourses leaving them hovering at their highest

since mid-2008 after a weekly rise of 1.8 percent.

As a curtain fell on the U.S. debt drama, bets were laid on

how much the likely hit to growth would cause the Federal

Reserve to 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


"The dollar has been left vulnerable by this uncertainty

especially in circumstances of growth stabilising in China."

Traders were continuing to sell it against a broad basket of

currencies from advanced and emerging economies as U.S. trading

gathered momentum, leaving the dollar index at 79.580.

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 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."


Investors were also relieved by data showing China's economy

grew 7.8 percent in the third quarter, its fastest pace this

year and meeting expectations, as firmer foreign and domestic

demand lifted factory output and retail sales.

China's CSI300 index climbed 0.7 percent, while

Australian shares jumped to their highest level since

June 2008. Australian exports are closely linked to China's

economic fortunes.

Shen Jianguang, chief China economist with Mizuho Securities

in Hong Kong, said the question regarding China was whether "the

current recovery is sustainable."

And though there was broad relief that the budget clashes in

Washington were over for now, investors were also retaining a

sense of caution following the last-minute deal.

While the deal pulled the world's largest economy back from

an historic debt default, it only funds the government until

Jan. 15 and raises the borrowing limit through to Feb. 7,

meaning another showdown could be on the cards.

"It (this week's deal) is positive in the fact we have

avoided a default but overall its not positive at all because we

still have a complete deadlock between the two parties," said

Philip Marey, U.S. focused economist at Rabobank.

"It will be January before we know it and we could see

another game of chicken."


Markets are also positioning 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 annualised

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

as its debt concerns remained prominent.

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 futures

back above $110 a barrel after a build-up of U.S. crude

stocks pushed oil prices down overnight.

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.