SINGAPORE (Reuters) - Asian stocks set a fresh two-year high on Monday, boosted by stronger-than-expected economic growth in China and bets that lacklustre U.S. data will keep the Federal Reserve cautious about the pace of further policy tightening.
Chinese blue-chips recouped steep early losses after data showed the world's second-largest economy grew at a slightly faster than expected pace of 6.9 percent in the second quarter, thanks to robust industrial output, retail sales and exports.
MSCI's broadest index of Asia-Pacific shares outside Japan extended earlier gains to climb 0.4 percent after the buoyant China readings. Japanese markets were closed for a holiday.
Australian shares, which started the day in negative territory, were 0.1 percent higher, while South Korea's KOSPI jumped 0.4 percent.
By midday in China, the CSI 300 was 0.2 percent higher, after slumping as much as 2.2 percent earlier. The Shanghai Composite narrowed earlier losses of as much as 2.6 percent to trade 0.1 percent lower.
Jingyi Pan, a market strategist at IG in Singapore, said the market fell initially after news at the weekend that President Xi Jinping wants to create a new cabinet-level committee to coordinate financial oversight, sparking concerns of further policy tightening.
Asian markets also rode the updraft from a strong Wall Street performance on Friday.
The Dow and S&P 500 hit record highs after data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter which could make Fed policymakers more cautious.
The chances of a Fed rate hike in December fell to 43.1 percent after the data came out from 55 percent late on Thursday, according to the CME Group's Fedwatch tool.
The dollar index, which tracks the greenback against a basket of trade-weighted peers, hit a 10-month low early on Monday. It was trading flat at 95.176 after losing 0.6 percent on Friday.
"Friday’s U.S. data led to more USD selling," Stephen Innes, senior trader at OANDA, wrote in a note.
"With less than a 50 percent December rate hike probability priced in, and with no supportive Fed speak on the calendar before July 26th, the dollar could struggle."
U.S. 10-year Treasury yields, however, which fell to as low as 2.279, recovered to end at 2.3319 percent on Friday.
The dollar was 0.1 percent higher at 112.61 yen early on Monday, after closing down 0.6 percent on Friday.
The Bank of Japan is expected to keep its monetary policy settings unchanged when it meets on Wednesday and Thursday.
The weakness in the dollar saw other currencies soar, with the Australian dollar hitting its highest level in over two years and the Canadian dollar touching a one-year high early on Monday.
The Aussie pulled back to trade 0.2 percent lower than its Friday close at $0.7811, following a 1.3 percent surge, and the loonie was 0.1 percent weaker at C$1.2655 to the dollar, retaining most of Friday's 0.6 percent jump.
The euro slipped slightly to $1.14625, but remained close to its highest in a year hit last week, after gaining 0.6 percent on Friday.
In commodities, oil inched higher, extending last week's gains on signs of lower U.S. inventories and stronger demand.
U.S. crude rose 0.2 percent to $46.64 a barrel.
Global benchmark Brent added 0.3 percent to $49.03.
The dollar's loss was gold's gain, with the precious metal rising on Friday. Spot gold was 0.15 percent higher at $1,230.85 an ounce.
(Reporting by Nichola Saminather; Editing by Eric Meijer and Kim Coghill)