HONG KONG--Asian stocks rose on Wednesday, extending their recent rally into an eighth straight day, inspired by hopes massive US government spending and tax cuts will continue to support the dollar and stimulate demand for exports.

The string of gains was the longest since October 2007, supported by a rebound on Wall Street and a steady improvement in Asian investment grade credit spreads as policymakers slash interest rates and pour capital into struggling industries to mitigate damage from the financial crisis.

Meanwhile, the US dollar was heading for a fourth day of gains against the euro, on expectations US President-elect Barack Obama will soon unveil a package of spending and tax cuts worth around $775 billion.

"US stocks, hopes for Obama, and a reversal of the broad dollar-selling positions made in December will support the dollar, possibly until Obama officially takes office later this month," said Kengo Suzuki, a currency strategist at Shinko Securities in Tokyo.

"But the state of the US economy is so miserable. That will prompt market players sooner or later to question the wisdom of extended dollar buying," Suzuki said.

Federal Reserve officials believed the US economy could weaken substantially further even with benchmark rates between zero and 0.25 percent, meeting minutes showed on Tuesday, feeding expectations of big borrowing needs at the US Treasury and weighing on long-dated government debt prices.

The MSCI index of Asia-Pacific stocks outside Japan was up 1.45 percent to the highest since early November, on track for an eighth consecutive session of gains.

The 4.1 percent rise in the index so far this week has exceeded the 1.5 percent increase on the all-country world index.

Japan's Nikkei share average rose 2.0 percent, trying to chalk up its first seven-day winning streak since one ended in April 2006.

Shares of small lenders received a boost from a newspaper report saying the government may inject money into regional banks with hopes they will be more forthcoming with loans.

An early rally in Hong Kong stocks fizzled and the Hang Seng index dipped into negative territory, weighed by a 5.2 percent drop in shares of China Construction Bank after news Bank of America is selling a stake in the firm at a discount.

Signs of life

The US dollar was broadly higher against major currencies, approaching a one-month high against the euro and the yen.

The euro was down 0.4 percent at $1.3473 heading back down toward Tuesday's low near $1.33.

Against the yen, the dollar edged up 0.2 percent to 93.88 yen after touching a high of 94.63 yen on Tuesday.

The dollar's rally has reflected yet more evidence of the currency's chameleon-like status throughout the financial crisis. It was shunned briefly because the United States was the epicenter of the credit crunch, then it was prized for what was seen as its safe-haven status.

Now the dollar has benefited from a much broader rebound in investors' willingness to take more risks for higher returns -- essential for the proper functioning of markets.

This rebound in risk may yet have legs to run.

"The current leg up in the markets may have a bit more life ahead of it, but a correction is likely next week, as gains have been quite pronounced and have come rather fast," said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong.

"Still, for medium-term investors, equity, commodity and credit markets continue to offer value as we believe prices will be much higher by year end," he said in a note.

In another sign that capital markets were slowly thawing after a horrendous 2008, the Philippines said on Wednesday it has launched a benchmark-sized sovereign bond offer, joining Brazil and Colombia who each sold $1 billion of 10-year bonds on Tuesday.

Long-maturity US Treasury yields, which move in the opposite direction of prices, climbed higher and increased the difference with relatively stable short-end yields.

The benchmark 10-year Treasury note yield was at 2.48 percent, up from 2.45 percent late in New York.

The 30-year bond yield was at 3.02 percent rising from 2.99 percent on Tuesday.

US oil prices were steady just below $49 ahead of US government inventory data later in the day expected to show rises across the board, signaling weak demand in the world's largest oil consumer.

Fighting between Israeli forces and Hamas reached an uncertain state as the two studied an Egyptian proposal for a ceasefire in the Gaza Strip on Wednesday that won immediate backing from the United States and Europe.

Israel's violent offensive in Gaza to protect its towns from Hamas rocket attacks helped to lift oil prices toward $50 a barrel in the last week.