Asian stocks hit a two-year high on Monday, boosted by stronger-than-expected economic growth in China and bets that lacklustre US data will keep the Federal Reserve cautious about the pace of policy tightening.

European markets also looked set for a positive start, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 and Germany's DAX to open 0.2 per cent higher, and France's CAC 40 to start the day up 0.1 per cent.

Chinese blue-chips recouped steep early losses after data showed the world's second-largest economy grew at a slightly faster than expected clip of 6.9 per cent 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 0.3 per cent after the buoyant China readings. Japanese markets were closed for a holiday.

Australian shares were down 0.2 per cent, while South Korea's KOSPI jumped 0.4 per cent.

China stocks

China stocks fell more than 2 per cent in early trade, but the main indexes later recouped most of their losses as the buoyant GDP reading prompted investors to scoop up blue chips on expectations of better earnings.

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 chance of a Fed rate hike in December fell to 43.1 per cent after the data, from 55 per cent late on Thursday, according to the CME Group's Fedwatch tool.

Dollar index

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 almost 0.1 per cent higher at 95.212 after losing 0.6 per cent on Friday.

“Friday's US data led to more USD selling,” Stephen Innes, senior trader at OANDA, wrote in a note.

“With less than a 50 per cent December rate hike probability priced in, and with no supportive Fed speak on the calendar before July 26th, the dollar could struggle.”

US 10-year Treasury yields, however, which fell to as low as 2.279, recovered to end at 2.319 per cent on Friday. The dollar was 0.1 per cent higher at 112.635 yen on Monday, after closing down 0.6 per cent on Friday.

BOJ policy stance

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 per cent lower than its Friday close at $0.7813, following a 1.3 per cent surge, and the loonie was 0.1 per cent weaker at C$1.2659 to the dollar, retaining most of Friday's 0.6 per cent jump.

The euro slipped 0.1 per cent to $1.14585, but remained close to its highest in a year hit last week, after gaining 0.6 per cent on Friday.

In commodities, oil inched higher, extending last week's gains on signs of lower U.S. inventories and stronger demand. US crude rose 0.3 per cent to $46.66 a barrel. Global benchmark Brent added 0.3 per cent to $49.07.

The dollar's loss was gold's gain, with the precious metal rising on Friday. Spot gold was 0.1 per cent higher at $1,229.90 an ounce.

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