By Marc Jones
LONDON (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
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 Tokyo-Mitsubishi.
"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 January 15 and raises the borrowing limit through to February 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."
U.S. GROWTH HIT, PORTUGAL LAGS
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.
(Editing by Catherine Evans, John Stonestreet)