By Wayne Cole
SYDNEY (Reuters) - Asian markets rallied on Monday with shares in Shanghai hitting three-year highs as the prospect of further policy stimulus in China and Europe whetted risk appetites globally while sending the euro skidding.
The single currency was near 28-month lows having shed 1.2 percent on Friday when European Central Bank President Mario Draghi surprised by declaring his commitment to fighting deflation.
That came hot on the heels of an unexpected cut in interest rates from the People's Bank of China, and sources told Reuters Beijing was ready to ease further to head off slowing inflation.
"China's rate cut adds to the determination of global policy makers to avoid deflation and support growth," said Shane Oliver, head of investment strategy at fund manager AMP Capital in Sydney.
"While U.S. quantitative easing may have ended, it's being replaced by QE in Japan and Europe and rate cuts in China," he added. "This in turn augurs well for shares and other growth assets."
Wasting no time, the Shanghai Composite Index shot up 2.1 percent. The CSI300 Index of the largest companies listed in Shanghai and Shenzhen leapt 2.9 percent, while Hong Kong gained 1.9 percent.
Tokyo's market was closed for a holiday on Monday, but MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.2 percent - its biggest daily gain in a month. Australia's main index climbed 1 percent.
European shares were expected to extend Friday's gains on signs the ECB is inching ever closer to outright purchases of government bonds.
"We will do what we must to raise inflation and inflation expectations as fast as possible," Draghi told an audience of bankers in Frankfurt on Friday.
The comments took a heavy toll on the euro which was stuck at $1.2390 having shed almost two cents on Friday. That was just a whisker away from a two-year low of $1.2358 plumbed earlier in the month.
Against the yen, the euro fetched 146.09, having dropped from a high of 148.43 on Friday.
The greenback was buying 117.91 yen, off a seven-year high of 118.98 set last week. It had faded just a little on Friday after Japanese Finance Minister Taro Aso said the yen's recent fall was "too rapid" and undesirable.
The euro nursed particularly heavy losses against the Australian dollar, which was given an added boost by the China rate cut. It traded at A$1.4261 after shedding nearly 2 percent.
Sources said China's leadership and central bank were ready to cut rates again and loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses.
The cut in rates was the first in more than two years and reflected a change of course by Beijing which had finally decided that a bold monetary policy step was required to stabilise the world's second-largest economy.
In commodity markets, oil edged up ahead of a key meeting of OPEC on Thursday amid uncertainty on whether producers would agree on a meaningful cut in output to support prices. Brent gained 37 cents at $80.73 a barrel, while U.S. crude rose 31 cents to $76.82.
Gold was steady around $1,200 an ounce, as traders cheered the prospect of more global stimulus.
(Editing by Shri Navaratnam)