SINGAPORE - Asian stocks set a fresh two-year high on Monday, boosted by stronger-than-expected economic growth in China and bets that lacklustre US data will keep the Federal Reserve cautious about the pace of further policy tightening.
Chinese blue-chips recouped steep early losses after data showed the world's second-largest economy grew at a slightly faster than expected pace of 6.9 percent in the second quarter, thanks to robust industrial output, retail sales and exports.
MSCI's broadest index of Asia-Pacific shares outside Japan extended earlier gains to climb 0.4 percent after the buoyant China readings. Japanese markets were closed for a holiday.
Australian shares, which started the day in negative territory, were 0.1 percent higher, while South Korea's KOSPI jumped 0.4 percent.
By midday in China, the CSI 300 was 0.2 percent higher, after slumping as much as 2.2 percent earlier. The Shanghai Composite narrowed earlier losses of as much as2.6 percent to trade 0.1 percent lower.
Jingyi Pan, a market strategist at IG in Singapore, said the market fell initially after news at the weekend that President Xi Jinping wants to create a new cabinet-level committee to coordinate financial oversight, sparking concerns of further policy tightening.
Asian markets also rode the updraft from a strong Wall Street performance on Friday.
The Dow and S&P 500 hit record highs after data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter which could make Fed policymakers more cautious.
The chances of a Fed rate hike in December fell to 43.1percent after the data came out from 55 percent late on Thursday, according to the CME Group's Fed watch tool.
The dollar index, which tracks the greenback against a basket of trade-weighted peers, hit a 10-month low early on Monday. It was trading flat at 95.176 after losing 0.6 percent on Friday.
"Friday’s US data led to more USD selling," Stephen Innes, senior trader at OANDA, wrote in a note.
"With less than a 50 percent December rate hike probability priced in, and with no supportive Fed speak on the calendar before July 26th, the dollar could struggle."
US 10-year Treasury yields, however, which fell to as low as 2.279, recovered to end at 2.3319 percent on Friday.
The dollar was 0.1 percent higher at 112.61 yen early on Monday, after closing down 0.6 percent on Friday.
The Bank of Japan is expected to keep its monetary policysettings unchanged when it meets on Wednesday and Thursday.
The weakness in the dollar saw other currencies soar, withthe Australian dollar hitting its highest level in overtwo years and the Canadian dollar touching a one-yearhigh early on Monday.
The Aussie pulled back to trade 0.2 percent lower than itsFriday close at US$0.7811, following a 1.3 percent surge, and theloonie was 0.1 percent weaker at C$1.2655 to the dollar,retaining most of Friday's 0.6 percent jump.
The euro slipped slightly to US$1.14625, butremained close to its highest in a year hit last week, aftergaining 0.6 percent on Friday.
In commodities, oil inched higher, extending last week'sgains on signs of lower US inventories and stronger demand.
US crude rose 0.2 percent to US$46.64 a barrel.
Global benchmark Brent added 0.3 percent to US$49.03.
The dollar's loss was gold's gain, with the precious metalrising on Friday. Spot gold was 0.15 percent higher at US$1,230.85 an ounce.