By Chikako Mogi
TOKYO (Reuters) - Asian shares extended gains for a second day on Thursday, buoyed by a rise in global equities on expectations that the U.S. Federal Reserve will not rush to end its stimulus program, and by further signs of improvement in China's strained money markets.
MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> rose 1.8 percent, after climbing 1.9 percent on Wednesday to break a four-day losing streak and moving away from an 11-month low touched earlier in the week.</.miapj0000pus>
Its relative strength index (RSI) improved but remained weak, with investors still nervous after a month-long emerging markets slide.
The market tone improved overnight after a surprisingly sharp downward revision to first-quarter U.S. economic growth eased fears that the Fed would soon wind down the bond-buying scheme that has underpinned investor risk appetite.
Steadying Chinese markets also helped calm emerging market currencies and stocks.
Chinese money market rates moderated for a fifth day on Thursday after last week's spike and stocks recovered some of their recent hefty losses as fears of a credit crunch eased.
Hong Kong shares <.hsi> rose 1.5 percent and Shanghai shares <.ssec> added as much as 1.2 percent before paring gains.</.ssec></.hsi>
Japan's Nikkei stock average, which was pulled down on Wednesday by losses in Chinese shares, rose 2 percent. <.t></.t>
Australian shares jumped 1.3 percent <.axjo> following Wall Street's overnight rally even as investors looked for direction on economic policy after a surprise change of prime minister.</.axjo>
Seoul shares extended gains and soared 2.8 percent <.ks11> as foreign investors turned net buyers, poised to snap 14 straight sessions of selling, after prices hit an 11-month low.</.ks11>
"The market is seeing a technical rebound on bargain hunting, but (upward moves) are probably not being established as a trend ... the stance on emerging markets is still cautious," said Lim Soo-gyoun, a market analyst at Samsung Securities, of Seoul shares.
CHINA ISSUE CONTAINABLE
With growing confidence in risk assets, Asian credit markets rallied, tightening the spread on the iTraxx Asia ex-Japan investment-grade index by 11 basis points.
The People's Bank of China did not drain any cash from the open market on Thursday. While short-term borrowing rates eased for a fifth day, they remained elevated, but traders said the credit crunch panic that gripped the market last week has subsided.
Volatility was amplified this week by fears that a crisis in China's banking system would undermine growth in the world's second-largest economy and offset the benefits of a stronger U.S. economy.
Chinese markets regained some stability after the central bank earlier this week moved to quell concerns by saying it had provided funds to some institutions and will do so if there is a need.
Yet, it remained committed to cracking down on risky informal lending, pointing to tougher conditions for the banking sector ahead and likely more bouts of nerves in Asian markets.
"There is a risk that squeezed credit could lead to 'shadow banks' failing, destabilizing China's financial system and undermining growth, raising downside risks globally - particularly for countries with high reliance on the Chinese economy," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
Fears of shrinking external funding channels, triggered by the Fed's plan announced last week to trim down its stimulus plan, drove the Indian rupee to an all-time low of 60.76 on Wednesday, reinforcing the vulnerability of a country with limited reserves and struggling to narrow a record-high current account deficit.
Worries about China and the prospect of an eventual end to the Fed's quantitative easing were likely to support the dollar, often seen as a safe haven in times of market turmoil.
The dollar eased 0.2 percent this session against a basket of major currencies <.dxy> after reaching a near one-month high of 83.025 on Wednesday.</.dxy>
It inched up 0.1 percent against the yen to 97.77.
U.S. Treasuries prices ended higher on Wednesday on weaker than expected GDP, but a five-year Treasury note auction drew its lowest demand since September 2009, showing persistent jitters over the Fed's future policy course.
U.S. crude futures rose 0.6 percent to $96.06 a barrel and Brent also added 0.6 percent to $102.25.
Spot gold surged 1.5 percent to $1,244 an ounce after a 4 percent tumble on Wednesday which brought prices to near three-year lows of $1,221.80 an ounce. Gold was seen pressured by the dollar's bullish outlook.
(Additional reporting by Jungyoun Park in Seoul; Editing by Eric Meijer)