GLOBAL MARKETS-Dollar suffers from Fed's inflation headache

* Dollar wallows at 2-week low after Fed minutes

* Asian stocks hit 10-year high in broad equity rally

* Euro set for fifth straight day of gains

* Italy bond yields fall after govt wins confidence vote

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

By John Geddie

LONDON, Oct (Shenzhen: 000069.SZ - news) 12 (Reuters) - The dollar sagged on Thursday after the U.S. Federal Reserve showed a more guarded view towards inflation, but that did not derail a rally in stock markets that pushed Asian shares to their highest in a decade.

Against a basket of six major currencies, the dollar wallowed at its lowest in more than two weeks after minutes from the Fed's September meeting showed policymakers had a prolonged debate about the prospects of a pickup in inflation and the path of future interest rate rises if it did not.

While this did not cool market expectations for a hike in December - which stand at around 80 percent, according to CME's FedWatch tool - it did make investors re-evaluate the long-term path for policy in the world's largest economy.

"We just had the minutes and saw there was a slightly more dovish take, so there is this ongoing debate about the lack of inflation momentum in the U.S.," said Benjamin Schroeder, senior rates strategist at ING.

European government bond yields fell broadly in step with U.S. peers, a trend led by Italian yields which were near a three-week low after the government in Rome won support for electoral change likely to penalise the anti-establishment 5-Star Movement.

U.S. and German 10-year yields fell 2 basis points to 2.32 percent and 0.44 percent, respectively, while Italian yields were down 4 basis points at 2.13 percent.

Reports that a market-friendly candidate was being pushed as successor to Janet Yellen at the helm of the Fed helped major stock indexes on Wall Street close at yet another record high on Wednesday.

Asia followed suit on Thursday with MSCI (Frankfurt: 3HM.F - news) 's broadest index of Asia-Pacific shares outside Japan up 0.7 percent and at its highest since December 2007.

Japan's Nikkei was up 0.4 percent after brushing 20,994.40, its highest since November 1996. South Korea's KOSPI added 0.55 percent to mark a fresh record peak and Hong Kong's Hang Seng scaled a decade-high.

MSCI's broadest index of world stocks also reached record highs as it has done for six of the last eight trading days .

"Fundamentally, the global economy is in decent shape. Corporate sentiment is also sound as evidenced by strong data like the Chinese PMI, U.S. ISM and Japanese tankan. All these factors are leading to the rise in global stocks," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

"Financial markets will remain wary of geopolitical headlines. But barring actual military conflicts, negative responses by equities are expected to be short-lived."

European stocks were less bouyant, with financial shares being the biggest burden and Just Eat (Frankfurt: A1100K - news) the top performer after its merger with Hungryhouse got provisional clearance.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

DOLLAR WEAK

Elsewhere in currencies, the euro nudged to its highest since Sept. 25 at $1.188 and was on track for its fifth straight day of gains.

Political developments in Italy and relief as the wealthy region of Catalonia stopped short of a formal declaration of independence supported the common currency, analysts said.

The yen was up 0.2 percent against the dollar, finding support after a media survey showed that Japanese Prime Minister Shinzo Abe's ruling party could come close to keeping its two-thirds "super" majority in an Oct. 22 lower house election.

The Mexican peso was up slightly at 18.695 pesos per dollar . That added gains of 0.7 percent overnight as it pulled away from a five-month low, although the currency was seen coming under renewed pressure if the ongoing North American Free Trade Agreement (NAFTA) talks run aground.

The United States, Mexico and Canada have negotiated this week to reform NAFTA. There are concerns that U.S. President Donald Trump could opt to withdraw from the pact if his demands for more favourable treatment are not met.

The Canadian dollar also rose against the greenback, extending overnight gains to reach C$1.2440 per dollar, its strongest in two weeks.

In commodities, oil prices eased as U.S. fuel inventories rose despite efforts by OPEC to cut production and tighten the market.

Brent crude oil was down 20 cents at $56.74 a barrel by 0730 GMT. U.S. light crude was 25 cents lower at $51.05. Both benchmarks have risen more than 20 percent from their lows in June as world oil markets have tightened.

Spot gold edged up to a 15-day high of $1,297.4 an ounce, supported by a weaker dollar.

(Reporting by John Geddie and Dhara Ranasinghe in London and Shinichi Saoshiro in Tokyo; Editing by Gareth Jones)