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GLOBAL MARKETS-Japanese stocks fall, dollar hemmed in near 2-yr low vs euro

Dominic Lau
Thursday, 24 Oct 2013 | 9:35 PM ET

* Seoul shares drop 0.5 pct, Tokyo's Nikkei down 0.9 pct

* Dollar near 2-year low vs euro, 2-weak low vs yen

TOKYO, Oct 25 (Reuters) - A stronger yen depressed Japanese stocks on Friday, while the dollar was hemmed in near a two-year low against the euro, reflecting expectations the U.S. Federal Reserve will continue its stimulus into 2014.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1 percent, reversing earlier slight gains. The index fell 0.1 percent on Thursday as rising Chinese money-market rates countered signs of a pick-up in manufacturing.

South Korean stocks dropped 0.5 percent.

In Tokyo, the Nikkei share average shed 0.9 percent as the dollar languished near a two-week low against the yen. It was on track to suffer its first weekly drop in three weeks.

Although the Japanese quarterly earnings season is still at an early stage, 70 percent of the 10 Nikkei companies that have reported so far missed market expectations, according to Thomson Reuters StarMine. That compared with 42 percent in the previous quarter.

U.S. S&P E-mini futures were flat in early trade. The S&P 500 index had advanced 0.3 percent on solid earnings and expectations that monetary stimulus will be in place for the foreseeable future after weak data.

U.S. manufacturing output fell for the first time in four years and the number of new claims for unemployment benefits fell less than expected last week. .

The euro was steady at $1.3788, not far from a two-year high of $1.3826 touched on Thursday and shrugging off data showing the pace of growth in euro zone business unexpectedly eased this month.

"The dollar will not rally without Fed tapering expectations rising again, but we would not chase EUR/USD higher here, as rate compression suggests the pair is unlikely to break much higher," Societe Generale analysts wrote in a note, saying they favoured Scandinavian and Antipodean currencies into year-end.

"Fed tapering expectations being pushed out into 2014 and further ECB easing early next year suggest a favourable policy environment for the FX carry trade. Throw in lower volatility and seasonality effects, and one has the perfect cocktail for the carry trade."

Against the yen, the dollar stood at 97.255 yen, a shade off the two-week low of 97.15 yen hit on Wednesday.

The dollar index, which tracks a basket of major currencies, was little changed.

Gold paused for breath after climbing 1.1 percent on Thursday, while U.S. crude prices added 0.1 percent to about $97.2 a barrel, moving away from a 3-1/2 month low of $95.95 touched in the previous session.