Asian shares hit a fresh 14-month high on Friday on optimism over U.S. earnings and the global economy, while the U.S. dollar got a reprieve after Federal Reserve Chairman Ben Bernanke indicated monetary policy would have to be tightened as a recovery takes hold.

Japan's benchmark Nikkei average rose 0.6 percent <.N225>, with resource-related stocks climbing after gold hit a fresh all-time high the previous day. <.T>

Investors are covering short positions, largely encouraged by a solid performance in overseas markets, said Masaru Hamasaki, a senior strategist at Toyota Asset Management, referring to worries in recent weeks that a seven-month stock market rally may have got too far ahead of economic fundamentals.

But trade was cautious in Tokyo due to persistent worries about the impact of a strong yen on corporate earnings and as investors were hesitant to actively take positions ahead of a long weekend in Japan, market players said.

The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> extended the week's robust gains to hit a 14-month high of 402.01 points. By late morning, it was 0.3 percent higher at 401.13.

The index has risen about 4.5 percent for the week, and is close to logging its best weekly gain in almost three months.

It has gained 62.2 percent so far this year, on track for its biggest annual jump since an 80 percent rise in 1993. But it is still down 32 percent from a peak hit in November 2007 before a global recession started to set in.

In South Korea, the central bank held interest rates steady as expected but is seen tightening monetary policy soon to head off a property boom.

South Korea and some of its Asia-Pacific neighbors have recovered more quickly from the global financial crisis than expected, in sharp contrast to the still-weak performance of major Western economies.

Unlike in the United States or Europe, which suffered from financially induced recessions, the slump in Asian economies was a more traditional recession based on weakness in U.S. demand, said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank in Hong Kong.

I think all you need for out-performance in Asia -- ideally you've got rising global indices, and Asia would out-perform in that environment.

But in fact you just need relative stability in global indices, and that gives us all a chance to refocus on domestic fundamentals, Foster said, adding that economic fundamentals looked positive throughout the region.

The Bank of Korea's rate decision had been in the spotlight after the Reserve Bank of Australia earlier this week became the first of the Group of 20 central banks to raise interest rates since the onset of the global financial crisis.

The RBA's rate hike underscored for many investors that the global economy is on the mend, and has spurred gains in energy and metal prices on expectations of a pick-up in demand.

U.S. stocks rose 0.6 percent on Thursday as a surprising quarterly profit from Alcoa Inc got third-quarter earnings reporting season off to a strong start. U.S. retailers also posted generally strong sales figures, while the number of U.S. workers filing jobless claims slid to a nine-month low.<.N>

DOLLAR GETS REPRIEVE

Buoyed by Bernanke's comments, the ailing dollar rose 0.8 percent against the yen to 89.10 yen, pulling away from an 8- month low of 88.01 yen hit on trading platform EBS earlier this week. The dollar's rise gained momentum after hitting some stop-loss bids.

The dollar also rose 0.3 percent against a basket of six major currencies to 76.222 <.DXY>, pulling away from a 14-month low of 75.767 hit this week, while the euro dipped 0.4 percent to $1.4731.

The dollar has come under renewed pressure in the past week as the prospect of U.S. interest rates remaining low for a while led to a sell-off, fuelling talk the dollar was becoming the preferred funding currency for leveraged carry trades.

Bernanke said on Thursday that while the U.S. central bank's vast support for the economy will likely be needed for a while, the Fed will have to remove those measures as the economy heals to ward off inflation.

U.S. 10-year Treasuries were down 6/32 in price to yield about 3.270 percent, up about 1 basis point from late U.S. trading on Thursday.

Gold inched lower to around $1,050 per ounce but was not far from a record high above $1,060 hit on Thursday.

Crude oil futures fell 55 cents to $71.15 a barrel after gaining 3 percent on Thursday as better-than-expected U.S. economic data fueled hopes that the global recovery was gathering steam.

(Additional reporting by Aiko Hayashi in Tokyo; Editing by Michael Watson & Kim Coghill)

Japan South Korea Nikkei 225 Ben Bernanke