Asian stocks rose nearly two percent to hit a five-month high and the dollar fell as both houses of Congress passed a bill to end the "fiscal cliff" crisis that threatened a U.S. recession and roiled world financial markets.

European markets were set to rally on the news, with spreadbetters expecting London's FTSE to rise about 1 percent and Frankfurt's DAX to open up 0.5 percent.

The Congress approved extending lower Bush-era tax rates to all but the nation's wealthiest households in a budget deal that stopped automatic implementation of $600 billion in spending cuts and tax increases.

The bill's passage in Congress allayed earlier concerns over complaints from a number of Republicans that spending cuts were still not adequately addressed.

The temporary reprieve that the deal offers the U.S. economy also sets up Wall Street for a strong start to trading which resumes later in the day.

Asian stock markets cheered the developments as a major risk for investors, namely a slump in the global economy, appeared to have receded for now.

"This is great news for global growth and explains why shares and other growth-related assets such as the Australian dollar are up strongly today," said Shane Oliver, strategist at AMP Capital.

Australian shares rose to a 19-month high while the Aussie dollar jumped to 1.4082.

The MSCI Asia Pacific ex-Japan index of stocks <.MIAPJ0000PUS> rose 1.9 percent. Chinese shares in Hong Kong jumped 3 percent as last month's rally spilled over into the new year with stocks closely linked to China's economy such as steel and cement posting the biggest gains.

In South Korea, where data showed manufacturing activity rose for the first time in seven months in December, the KOSPI index <.KS11> was up 1.6 percent led by a 3.6 percent jump in smartphone giant Samsung Electronics <005930.KS>.

"The index is riding high on the U.S. fiscal deal. This upward momentum will last a couple of weeks, after which there will be a reality check due to the unresolved issue of the spending cuts and debt ceiling," said Cho Tae-hoon, an analyst at Samsung Securities.

Singapore was the best-performing market in South East Asia rising 1.2 percent after data showed the city-state dodged an expected economic recession in the last three months of 2012.

RISK ON

Asian stocks outside Japan rose nearly 20 percent last year as a combination of improving economic data from China, easing worries about a euro zone blow-up, and global central bank easing that encouraged investors back into equity markets.

Sakthi Siva, Asia strategist for Credit Suisse, said in a note to clients that 2013 could see similar returns for Asian equities, given a solution to the fiscal crisis.

"As we move into 2013 we retain our bullish bias, and our theme is whether markets could catch up with earnings," said Siva, adding that markets in China and India could offer the most upside given the mismatch between index levels and earnings expectations.

Risky assets across the board got a lift with crude oil futures up 1.1 percent and copper futures in London jumping 1.7 percent.

The euro rose to $1.3261 against the U.S. dollar.

The safe-haven U.S. dollar edged lower, falling 0.4 percent against a basket of major currencies .

The Japanese yen continued its slide as investors wagered the Bank of Japan would have to take ever-more aggressive easing steps to support the economy and satisfy the new government.

The yen fell to 87.17 against the dollar to its weakest level since July 2010.

The Japanese currency also dropped to depths not seen in more than four years against the Australian and New Zealand dollars.

(Additional reporting by Wayne Cole in SYDNEY, Masayuki Kitano in SINGAPORE and Somang Yang in SEOUL; Editing by Eric Meijer)