* Investors still see US stimulus cut later this year
* Indian markets roiled by surprise rate hike by c.bank
* European shares seen opening slightly down
* Euro near 7 1/2-mth high vs dlr but cautious ahead of German vote
By Hideyuki Sano
TOKYO, Sept 20 (Reuters) - Asian shares ran out of steam on Friday, as investors pondered the Federal Reserve’s next move, but a regional benchmark was on track for its best week in more than a year thanks to the U.S. central bank.
Indian financial markets were roiled after the Reserve Bank of India unexpectedly raised the key policy rate by 25 basis points, triggering a fall in the country’s currency, shares and bond prices.
European shares are expected to open lower, with both Germany’s DAX and Britain’s FTSE seen down 0.2 percent.
Most Asian indexes softened after Thursday’s surge following the Fed’s shock decision not to reduce its monetary stimulus at this time. Asian trading was slowed by holidays in China and South Korea.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.2 percent on Friday. But for the week, it was up 3.1 percent. If that is sustained, it will be the biggest gain since the week ended Sept. 14, 2012.
The Fed’s decision sparked a broad-based rally in global stocks, commodities and riskier currencies as sentiment was buoyed by the prospect of cheap dollars sloshing around financial markets for some more time.
That gave a much-needed fill-up to emerging markets, which had suffering for months from concern that an end of cheap dollars could cause capital outflow.
“In a way, the decision was good for the global economy in the short term. But it’s a bit like you were supposed to have an injection but you decided not to, because it looked painful. Whether it was a right call remains to be seen,” said Arihiro Nagata, head of foreign bond trading at Sumitomo Mitsui Banking Corp.
Fed tapering expectations were kept alive by data on Thursday showing U.S. home resales surged in August to a 6-1/2-year high and factories grew busier in the Mid-Atlantic region this month.
That helped push the U.S. 10-year notes yield back up to 2.73 percent from a five-week low of 2.67 percent touched just after the Fed’s decision.
Many market players still expect the Fed to start reducing its stimulus later this year.
The dollar index, which measures it against a basket of six major currencies, stood little changed at 80.35 , off seven-month lows of 80.06 hit on Wednesday.
“We think the dollar is likely to recover quickly versus the lower yielding currencies in the G10,” analysts at BNP Paribas wrote in a client note.
The euro held not far from a 7 1/2-month high of $1.3568 hit on Thursday, last trading at $1.3533.
The common currency has been supported by signs of recovery in the euro zone economy, but some investors are getting nervous ahead of Germany’s election on Sunday.
While Chancellor Angela Merkel is likely to win her third term, her lead has narrowed in recent opinion polls and a new eurosceptic party, Alternative for Germany, could make headway in the parliament, which could rattle some investors.
“If the party gets 5-to-6 percent of the vote, people will start gauging the risk of Germany leaving the euro. That would be negative for the euro zone shares,” SMBC’s Nagata said.
As the dust settles from the Fed’s jolt, some Asian currencies could come under renewed pressure, some analysts said.
The Indian rupee fell 1.0 percent to 62.40 to the dollar while Indian shares fell more than 2 percent.
The Indonesian rupiah gave up some of Thursday’s gains to trade at 11,390 per the dollar, down 1.0 percent on the day. Jakarta shares, which jumped 4.7 percent on Thursday, lost 1.3 percent.
In the commodities market, U.S. crude futures extended losses on Friday after a 1.5 percent drop the previous day on increased Libyan production signs of diplomatic thaw between Iran and the West.