HONG KONG (Reuters) � Asian stocks shot to a two-year high on Monday, boosted by interest in emerging markets, while the dollar edged up after last week's selloff though speculation the Federal Reserve will add to money supply was still rife.
The dollar remained close to an eight-month low against a basket of major currencies (.DXY), with expectations increasing the Fed will resort to a second round of bond purchases before the year is over to support the U.S. economy.
By contrast, Chinese manufacturing activity has held up surprisingly well, keeping investors confident about the region's prospects and pushing up the MSCI index of Asian stocks outside Japan (.MIAPJ0000PUS) to the highest level since June 2008.
"Continued foreign buying, amid the U.S. dollar's recent weakness and an increasing preference for emerging market stocks, has lifted the market to a new high," said Lee Jin-woo, a market analyst at Mirae Asset Securities in Seoul.
Strong foreign portfolio flows into the region have lifted Asian currencies, putting pressure on regional central banks to step up intervention to limit the inflow of speculative "hot money" and to support their export-oriented economies.
In South Korea, foreign investors were buyers of a net 141 billion won ($124.8 million) worth of stocks, poised to pick up shares for a 14th straight session, the longest buying streak since April.
Japan's Nikkei (.N225) reversed earlier losses and was up 0.3 percent as the yen weakened against the dollar and ahead of a Bank of Japan policy decision on Tuesday.
The dollar surged in a short-covering rally against the yen, which retreated against other currencies as investors unwound some long yen positions ahead of the BOJ meeting.
CENTRAL BANKS ON TAP THIS WEEK
Former BOJ Deputy Governor Toshiro Muto said on Friday the central bank may ease policy as inaction would run the risk of spurring further yen gains, given the prospects for easing by the U.S. Federal Reserve.
Traders are not expecting the BOJ to make a substantial change to policy but may hold off on big bets on the yen ahead of central bank meetings in Britain and the euro zone on Thursday, as well as the September U.S. payrolls report on Friday.
"Nervous trade will likely continue this week, even after tomorrow's event, as U.S. jobs data is also set to be released later in the week," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
The MSCI index of Asia Pacific shares outside Japan, which has risen for six consecutive weeks, was up 1.1 percent with a 2.3 percent gain in the energy sector leading the pack on the back of firm crude prices.
Hong Kong's Hang Seng index (.HSI) led regional exchanges, rising 1.4 percent, with oil-related stocks such as CNOOC Ltd (0883.HK) providing the most support to the market.
Petrochina Co. (0857.HK), the world's second-most valuable oil and gas producer, was up 3.7 percent in Hong Kong.
U.S. crude futures were steady near a two-month high at $81 a barrel, having risen $5 in the past week on the dollar's weakness and as a strong revival in Chinese manufacturing by a mid-year lull appeared to soothe fears of a new downturn in the global economy.
The dollar looked vulnerable against a basket of currencies, hovering near Friday's eight-month low, but had edged up 0.2 percent against a basket of currencies in Asian trade(.DXY).
"It's still a dollar-negative situation but short-term probably the market has priced a lot in," said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital.
Asian currencies, such as the South Korean won and Taiwanese dollar, climbed against the dollar, despite an estimated $18.8 billion spent by regional central banks last week to keep their currencies weak, according to estimates from traders compiled by IFR Markets.
The potential of significant amount of cheap money being added to the financial system via the Federal Reserve continued to support gold prices.
The precious metal was up 0.2 percent to $1,317.55 an ounce, after hitting a fresh record of $1,320.80 on Friday on sustained dollar weakness.
(Additional reporting by Charlotte Cooper in Tokyo and Catherine Tan in Singapore; Editing by Ron Popeski)
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