Oil prices fell to a seven-week low below $125 a barrel Thursday as U.S. energy demand was seen reaching a tipping point, sending investors back into Asian stocks for the fourth consecutive day. Both Japan and South Korea closed 2 percent higher.
A retreat in oil prices and signs of improved confidence in the U.S. financial sector also pushed the U.S. dollar to a one-month high against the yen.
Adding to a sense of short-term relief, U.S. President George W. Bush dropped a threat to veto a housing-bailout bill that would extend a potential $25 billion lifeline to the embattled mortgage lenders Fannie Mae and Freddie Mac.
The drop in oil and the potential housing rescue together have stopped cold a popular trade in which dealers would simultaneously bet against the financial sector and put their money in the energy sector. The unwinding of this trade has accelerated the upward momentum in equities. However, uncertainty loomed as to whether economics were supporting the global stock market rally, particularly after data showed Japanese exports fell for the first time in five years.
Japan's Nikkei 225 Average rose 2.2 percent to book a four-week closing high, as Toyota Motor and other automakers led gains by exporters on a softer yen versus the dollar and a drop in oil prices.
South Korea's KOSPi also added 2.2 percent on weaker oil prices, with Samsung Electronics up on talk it would announce a share buyback, while Hyundai Motor gained despite disappointing earnings.
Australian stocks rose 0.8 percent as hopes of a bailout for Fannie and Freddie lifted financial firms, though falls in commodity prices dented the resource sector.
Hong Kong shares closed 0.2 percent lower after a skittish trading session. Financial stocks managed some gains even as resources shares dragged the main index off its highs on lower commodity prices. Bourse operator Hong Kong Exchanges & Clearing rose to a five-week high, recovering sharply from the HK$100 low it hit on July 8.
Singapore's Straits Times Index closed flat with banks such as DBS Group and United Overseas Bank moving forward.
China's Shanghai Composite Index rose 2.6 percent, led by oil refiners and banks, after global oil prices fell further, partly easing concern about inflation. Sinopec, Asia's biggest refiner, gained as lower crude oil prices could help its refining margins. China Construction Bank climbed after it denied a brokerage estimate that it held $7 billion in bonds issued by troubled U.S. mortgage lenders Fannie and Freddie.