Asian shares extended gains for a seventh day on Thursday, after the U.S. Federal Reserve took new stimulus steps to bolster the economy, pressuring the yen with expectations the Japanese central bank will follow suit with more easing next week.
While stocks gained, oil and gold fell from post-Fed rallies, as investors took profits ahead of the year-end.
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Despite the Fed's fresh dose of liquidity-pumping measures, the upside for stocks was also contained by concerns about the lack of breakthrough in U.S. budget talks to avert the "fiscal cliff," some $600 billion of tax hikes and spending cuts scheduled to start in January.
Failure to reach a compromise by the end of the year risks pushing the U.S. economy into recession and has stoked fears that a fragile recovery trend emerging in China and some other countries would be stifled.
U.S. stocks ended little changed on Wednesday, giving up most of the day's gains after Fed Chairman Ben Bernanke warned of damage from the "fiscal cliff", and as U.S. House of Representatives Speaker John Boehner said "serious differences" remain with President Barack Obama.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> added 0.3 percent to a 16-month peak, having hit successive 16-month highs since December 5. South Korean shares <.KS11> hit a two-month high and were last up 0.5 percent.
"The Fed's easing measures met the market's expectations, while the setting of clear inflation and unemployment targets exceeded hopes and will clear uncertainty on the monetary front," said Kim Yong-goo, an analyst at Samsung Securities.
The U.S. central bank, cut its forecasts for economic growth and inflation next year, committed to monthly purchases of $45 billion in Treasuries on top of the $40 billion per month in mortgage-backed bonds it started buying in September.
But it also took the unprecedented step of indicating interest rates would remain near zero until unemployment falls to at least 6.5 percent.
YEN WEAKNESS CONTINUES
The dollar advanced to its loftiest in nearly nine months against the yen, touching a high of 83.44 yen. The yen's slump boosted Japan's Nikkei share average <.N225> up 1.6 percent and above 9,700 for the first time in eight months.
The Bank of Japan meets December 19-20 and is widely expected to further ease monetary policy to support its weak economy.
The Fed's latest move to make the jobless rate a target for its monetary policy could have a longer-term implication on the BOJ.
"While the BOJ's ultimate goal is to pull Japan out of deflation, the Fed's latest move could prompt Japanese politicians or the government to urge the BOJ to also commit itself to growth, not just price stability," said Chotaro Morita, chief fixed income strategist at Barclays.
Morita said that market consensus is for the BOJ to expand its asset-buying and lending program, currently at 91 trillion yen ($1.1 trillion), by another 5-10 trillion yen, and put off taking bolder steps until after a new cabinet is formed.
Japan holds an election on Sunday, with opinion surveys showing conservative former Prime Minister Shinzo Abe's opposition Liberal Democratic Party and its smaller ally heading for a resounding victory.
Abe wants to step up aggressive monetary easing along with heavy public works spending, policy prescriptions dubbed "Abenomics" by the media, and while his threat to curtail the BOJ's independence has unsettled investors, investors reckon the responsibility of power will prevent Abe taking excessive risks that could lead to a bond market meltdown.
The euro was relatively less volatile compared to the dollar and the yen, steadying around $1.3066 after reaching a high of $1.3098 on Wednesday.
Greece's foreign lenders welcomed a bond buyback even though it narrowly fell short of a target to cut the country's debt, paving the way for Athens to get long-delayed aid to avoid bankruptcy.
In Italy, another debt-straddled euro zone country, Silvio Berlusconi offered to stand back and make way for Mario Monti as Italy's next leader if the outgoing technocrat premier agreed to run as the candidate for a center-right coalition. Monti's intention to resign has raised concerns that his austerity policies may not be carried out.
Oil prices retreated from overnight rises, with U.S. crude futures easing 0.3 percent to $86.48 a barrel and Brent falling 0.5 percent to $109.01.
Gold tumbled more than 1 percent on stop-loss selling, after the Fed's announcement of a fresh round of bond buying lifted prices to their highest levels in nearly two weeks. Spot gold dropped 1 percent to $1,694.16.
($1 = 82.9300 Japanese yen)
(Additional reporting by Somang Yang in Seoul; Editing by Jacqueline Wong)