* Asian shares extend rebound, Nikkei hits 8-month high
* Strong earnings outlook outweigh immediate worries on trade
* Euro at 2 1/2-month high vs dollar
By Hideyuki Sano
TOKYO, Sept 21 (Reuters) - Asian stocks extended gains on Friday after Wall Street's S&P 500 set a new all-time high, while the dollar slipped on views that Beijing's and Washington's fresh exchange of tariffs may be less damaging than initially feared.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6 percent. It has rebounded 4 percent from a 14-month low on Sept. 12, buoyed in part by expectations that China will pump more stimulus into its economy to weather the trade war.
Japan's Nikkei rose 0.6 percent, hitting an eight-month high.
On Wall Street, trade-sensitive industrial stocks led the gains on Thursday. The Dow Jones Industrial Average rose 0.95 percent while the S&P 500 gained 0.78 percent, both hitting record highs that took them deeper into technically overbought territory.
The latest rally comes after new U.S. and Chinese tariffs on each other's goods were set at lower rates this week than previously expected, raising hopes that hostilities between the world's two largest economies may be easing.
Despite growing anecdotal reports from companies on both sides of the Pacific that the trade war is starting to impact their operations, the outlook for corporate profits remained solid in many markets on the back of strong global growth, keeping equity valuations relatively attractive.
"Of course, the trade war will continue. We have to see how much damage the tariffs will cause to China's exports. But it will probably be the early next year that we will see that in hard data," said Nobuhiko Kuramochi, chief strategist at Mizuho Securities.
"And any progress in Sino-U.S. trade talks may have to wait until after the U.S. mid-term elections. This will be a long term issue," he said.
Still, some analysts cautioned that the reversals in various assets including U.S. industrial shares and non-U.S. developed markets could be driven primarily by position squaring ahead of the end of quarter, and not reflect a sustained shift in investor sentiment.
Chinese shares, which had been hit the hardest by the trade war, have bounced this week. The CSI 300 index of Shanghai and Shenzen shares, which hit a two-year low last week, rose 0.6 percent in early Friday week for a weekly gain of 2.7 percent.
MSCI's ACWI, an index covering the world's 47 markets, edged up 0.15 percent to near its 5 1/2-month high hit at the end of August, having gained 1.4 percent so far this week.
Leading the gains were developed markets outside the U.S. , which have risen 2.3 percent so far this week.
They outperformed U.S shares, which have risen 0.8 percent, reversing their underperformance since early May when trade disputes intensified.
In the currency market, the dollar slipped to three-month low against a basket of major trading partners as easing worries on trade wars quelled bids for dollar.
The euro last traded at $1.1781, just below its 2 1/2-month high of $1.1785 touched on Thursday.
The dollar's weakness and spikes in U.S. Treasuries yields this week raised suspicions that some sovereign players may be selling the dollar they hold in their foreign reserves for other currencies.
But Simon Derrick, chief currency strategist at BNY Mellon in London, said that there is no convincing evidence yet of such a major shift in forex reserves holdings, adding the euro's rise could be more related to easing pressure on Italian bonds.
"This suggests that the next week will prove to be critical in determining the outlook for the euro. In particular, next Thursday will see the release of Italy's Economic and Financial Document. This should provide the first real indication of the scale of the planned fiscal deficit for 2019," he said.
The British pound climbed to as high as $1.3295, its highest since early July, after strong UK retail sales data.
The closely-watched summit of the European Union produced little progress on the thorny issue of trade and the Irish border.
EU leaders have warned British Prime Minister Theresa May that they are ready to cope with Britain crashing out of the bloc if she does not compromise.
At home, Britain's former Brexit minister David Davis has said up to 40 lawmakers from the ruling party will vote against May's plans to leave the European Union, meaning she may struggle to get her deal through parliament.
The pound last stood at $1.3272.
The yen hit a two-month low of 112.585 to the dollar on Thursday and last stood at 112.51.
Oil prices have pulled back from recent highs after U.S. President Donald Trump urged OPEC to increase production at its meeting in Algeria.
U.S. light crude was down 0.1 percent at $70.22 a barrel. Brent crude oil were little changed at $78.72 a barrel. (Editing by Sam Holmes and Kim Coghill)