Asia stocks ring out 2010 with solid gains but dollar dips

(Reuters) - Most Asian stock markets looked set on Friday to end the year with solid gains and further advances are expected in 2011, but worries about the sluggish U.S. economy and Europe's festering debt crisis will likely keep investors on edge well into the new year.

While data shows a U.S. economic recovery is finally gaining some traction, unemployment remains stubbornly high and there are no signs that the Federal Reserve will begin to reverse its super-loose monetary policy any time soon.

The Fed's moves to shore up the economy this year and record low interest rates in the West have unleashed a flood of cheap money into riskier assets as investors seek higher returns, a trend that is likely to continue in the coming year.

Those inflows have largely targeted faster-growing emerging markets such as those in Asia, boosting share prices and hobbling the U.S. dollar, while spurring prices for oil, gold and other commodities to multi-year or record highs.

"Europe will definitely be a big focus and I wouldn't be surprised to see a European country default in 2011," a trader at a U.S. investment bank said.

"I think the U.S. economy will also show more convincing signs of recovery next year, so I'd be looking to buy U.S. dollars, maybe after March. The first quarter will probably see a strong rally in equities, so it'll be a risk-on environment."

The MSCI index of Asian stocks excluding Japan inched up on Friday in thin trade, with many of the region's markets already closed ahead of the New Year holiday.

Despite a slide early in the year on growing worries about Europe, and another scare late in the year as Ireland was forced to take a rescue package, the index looked set for a gain of 15 percent for 2010, powered largely by the region's strong economic growth and outpacing a 10 percent rise in the MSCI world index.

Still, the Asia index was about 19 percent off its all-time highs in 2007 before the global financial crisis set in.

Consumer discretionary stocks led the charge in 2010, surging 32 percent, reflecting abundant confidence in Asia's prospects despite lingering worries about anemic demand in the West.

Gains in the region were led by Southeast Asia, with Indonesia's main stock index surging 46 percent as foreign investors rushed in, and in East Asia by South Korea, where the KOSPI gained nearly 22 percent despite mounting tensions with North Korea late in the year.

Oddly, while China's voracious demand boosted global growth prospects and commodity prices, stocks in Shanghai missed out on the 2010 rally. The main index fell 15 percent on worries that the government would take more aggressive measures to keep the racing economy and property prices from overheating.

The slide in Shanghai also weighed on Hong Kong, capping gains for the Hang Seng index at around 5 percent.

Japan and Australia also underperformed, with the Nikkei falling 3 percent on the year as the yen rose 12 percent against the sputtering dollar, threatening to make its exports less competitive even as the broader economy floundered.

Australian shares looked set to end the year 2 percent lower despite the country's burgeoning commodity exports to China, but foreign investors still gained considerably because of a 13 percent rise in the Australian dollar against the U.S. dollar.

Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney, predicts a comeback for Australian shares next year.

"At 12.5 times earnings, the index is now cheap based on historic levels. The global recovery and feverish M&A activity from cash-rich Australian firms should underpin gains next year," he said.

By comparison, the Dow Jones industrial average looks set to close the year with a gain of about 11 percent.

Reuters polls show investors are relatively bullish about 2011, raising equity holdings in expectation of robust corporate earnings and increasing exposure to high-yield credit, while cutting back on government debt.

DOLLAR WEAKNESS TO CONTINUE

The dollar is widely expected to remain on the back foot at least through the first quarter of 2011, with the health of the U.S. economy and any improvement or deterioration in Europe's debt situation seen as the main drivers for the year.

Undermined by the euro-zone debt crisis, the euro lost some 7 percent against the dollar over the year. With no resolution in sight to the debt mess, and fears that it could get even worse, many analysts expect further euro weakness early next year.

Yet, the single currency's downside has been limited by buying interest from central banks, particularly from those in Asia, which emerged around the $1.3000 area.

GOLD SHINES IN COMMODITY RALLY

Spot gold held steady on Friday at $1,406 an ounce, on track for a 28 percent rise this year. Analysts see further gains next year, possibly taking bullion to $1,500 or more.

U.S. copper futures shot to a record high of 439.6 cents per pound and could finish the year nearly a third higher as a weaker dollar, strong demand and tighter supplies boosted base metal prices.

Crude oil futures slipped on Friday but were poised for a 14 percent gain this year, adding to the allure of energy shares. But recent fuel price gains have added to worries that inflation could flare up in the new year even as many economies remain weak.

Many Asian central banks have steadily raised interest rates this year to combat mounting price pressures, even as the Fed and European Central Bank keep borrowing costs at rock bottom in an attempt to spur demand.

(Additional reporting by Ian Chua and Narayanan Somasundaram in SYDNEY; Editing by Neil Fullick)