GLOBAL MARKETS-Asian shares run out of steam after Fed-sparked rally
* Investors pause, still see stimulus cut later this year
Fresh upbeat US data supports Fed tapering expectations
* Euro near 7 1/2-month high vs dlr but cautious ahead of German vote
* Relief in emerging currencies could be short-lived
* Indian rupee in focus ahead of RBI statement
By Hideyuki Sano
TOKYO, Sept 20 (Reuters) - Asian shares ran out of steam on Friday as investors pondered what policy the U.S. Federal Reserve will pursue after it triggered a global market rally by leaving its stimulus level unchanged.
The dollar drifted off a seven-month low against a basket of major currencies and U.S. Treasury yields rose after a string of upbeat U.S. data provided a reminder to markets that the day the Fed starts to cut its bond-buying is not far off.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat, though trading was slowed by holiday in China and South Korea. On the week, however, the index was up 3.3 percent, which would be its biggest gain in more than a year, if sustained.
Japan's Nikkei average initially eked out a gain to hit an eight-week high, but then slipped and was 0.2 percent down for the day.
"This has been a very positive week for Japan and risk assets in general. First, we had (Lawrence) Summers' exit the race to head the Fed, and the surprise Fed decision not to taper gave another boost for risk appetite," wrote Stefan Worrall, director of equity cash sales at Credit Suisse.
The Fed's shock decision on Wednesday sparked a broad-based rally in global stocks, commodities and riskier currencies as sentiment was buoyed by the prospect of cheap dollars sloshing around in financial markets for some more time.
That gave a much-needed fill-up to emerging markets, which had suffering for months from concern that an end of cheap dollars could cause capital outflow.
"In a way, the decision was good for the global economy in the short term. But it's a bit like you were supposed to have an injection but you decided not to, because it looked painful. Whether it was a right call remains to be seen," said Arihiro Nagata, head of foreign bond trading at Sumitomo Mitsui Banking Corp.
Fed tapering expectations were kept alive by data on Thursday showing U.S. home resales surged in August to a 6-1/2-year high and factories grew busier in the Mid-Atlantic region this month.
That helped push the U.S. 10-year notes yield back up to 2.75 percent from a five-week low of 2.67 percent touched just after the Fed's decision.
Many market players still expect the Fed to start reducing its stimulus later this year.
The dollar index, which measures it against a basket of six major currencies, stood little changed at 80.35 , off seven-month lows of 80.06 hit on Wednesday.
"We think the dollar is likely to recover quickly versus the lower yielding currencies in the G10," analysts at BNP Paribas wrote in a client note.
The euro held not far from a 7 1/2-month high of $1.3568 hit on Thursday, last trading at $1.3535.
The common currency has been supported by signs of recovery in the euro zone economy, but some investors are getting nervous ahead of Germany's election on Sunday.
While Chancellor Angela Merkel is likely to win her third term, her lead has narrowed in recent opinion polls and a new eurosceptic party, Alternative for Germany, could make headway in the parliament, which could rattle some investors.
"If the party gets 5-to-6 percent of the vote, people will start gauging the risk of Germany leaving the euro. That would be negative for the euro zone shares," SMBC's Nagata said.
As the dust settles from the Fed's jolt, Asian currencies could come under renewed pressure, some analysts said.
The Indonesian rupiah gave up some of Thursday's gains to trade at 11,340 per the dollar, down 0.6 percent on the day. Jakarta shares, which jumped 4.7 percent on Thursday, lost more than 1 percent.
The Indian rupee weakened 0.6 pct to 62.15 to the dollar ahead of a policy announcement from the Reserve Bank of India at 0530 GMT, the first one under its new chief Raghuram Rajan.
Economists expect Rajan to leave key policy rates unchanged and keep measures to support the rupee, though some others expect he might consider scaling back some of the steps that have supported the rupee but stifled credit.
In the commodities market, U.S. crude futures extended losses on Friday after a 1.5 percent drop the previous day on increased Libyan production signs of diplomatic thaw between Iran and the West.