Financial markets gave a cautious thumbs-up on Wednesday to a provisional budget deal that could prevent the U.S. government from shutting down in the coming months.

News that U.S. budget negotiators had reached a two-year agreement couldn't overcome the year-end blues in Asia. It was more warmly received in Europe, where shares inched higher and the dollar began to firm.

For many investors, the deal carried dual significance. It removed a key uncertainty hanging over markets, and it raised expectations that the U.S. Federal Reserve will soon start scaling back its $85 billion-a-month stimulus program.

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"It certainly does appear that a window of opportunity could be opening up for the Fed to act next week without a sharp market reaction," said CMC Markets strategist Michael Hewson.

"The only question remaining is as to whether they will avail themselves of it."

The to-and-fro of when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months. A recent run of strong data and comments from policymakers have bolstered expectations the process will start soon.

The bipartisan budget deal announced in the U.S. Congress on Tuesday, though modest in its spending cuts, would end three years of impasse and fiscal instability in Washington that culminated in October with a partial government shutdown.

While praised by the Republican leadership of the U.S. House of Representatives, including Speaker John Boehner and Majority Leader Eric Cantor, the agreement faces a challenge from some House conservatives and will require support of the minority Democrats to pass.

The backing of President Barack Obama, who also hailed the agreement as "a good first step," should help round up votes of his fellow Democrats. He urged Congress to quickly pass it.

Obama and most congressional leaders long ago abandoned talk of larger but increasingly elusive "grand bargains" that would significantly slash the nation's deficit.

Democratic Senator Patty Murray and Republican Representative Paul Ryan, who appeared before reporters Tuesday evening to announce the $85 billion budget accord, portrayed it as the beginning of a new era.

"For far too long compromise has been considered a dirty word," said Murray, chairwoman of the Senate Budget Committee, adding that the uncertainty created by three solid years of Washington bickering "was devastating to our economic recovery."

Ryan, the Republican Party's 2012 failed vice presidential candidate who has his eye on either a 2016 presidential campaign or potentially a House leadership post, wasted no time in trying to blunt criticism of the pact, especially from fellow conservatives.

"In divided government, you don't always get what you want," said Ryan, chairman of the House Budget Committee

But he added, "I think this agreement is a clear improvement on the status quo. This agreement makes sure that we don't have a government shutdown scenario in January. It makes sure we don't have another government shutdown scenario in October. It makes sure that we don't lurch from crisis to crisis."

Over the last two days, conservative groups, including Americans for Prosperity and Heritage Action for America, blasted the deal as it was being negotiated and called on Republicans to reject it.

Such groups hold sway with some House Republicans, and with the 2014 congressional elections coming into focus their opposition could complicate its passage.

The Ryan-Murray plan would blunt the effect of automatic "sequester" spending cuts by allowing federal agencies and discretionary programs to spend $63 billion more over two years, while savings are made elsewhere. It also would provide an additional $20 billion to $23 billion in deficit reduction over 10 years.

While the measure could improve Congress' ability to pass must-do bills to keep the government running, many saw this as marking an end to any chance of Washington enacting a major new deficit-reduction law anytime soon.

"I've given up on grand bargain. There's not going to be a big, grand bargain with (this) Senate and president. That just is not going to happen," said Republican Representative James Lankford of Oklahoma.

Republican Senator Marco Rubio, who could compete against Ryan in a 2016 White House bid, blasted the deal, saying, "This budget continues Washington's irresponsible budgeting decisions by spending more money than the government takes in and placing additional financial burdens on everyday Americans."

SIDESTEPPING TOUGH ISSUES

The accord was uncharacteristic for a politically polarized Congress that in recent years has waited until the absolute last moments to reach stop-gap agreements on the budget and on raising U.S. borrowing limits to avert historic debt defaults.

Instead, Ryan and Murray came to a handshake before a non-binding Friday deadline and more than a month before the January 15 date when existing funds to run many federal programs expire.

Their work was made easier by the simple fact that they avoided most of their parties' biggest disagreements in budget debates: the future of big retirement and healthcare programs that Republicans want to cut and the closing of tax loopholes that benefit the rich, which Democrats want to attack.

The House is likely to put the deal to a vote by Friday, before recessing for the year, and a Senate vote might come next week.

Boehner, who as the House speaker was at the center of bitter budget fights with Obama in 2011, 2012 and 2013, said: "While modest in scale, this agreement represents a positive step forward" that, he added, would further cut budget deficits without tax hikes.

While it included no tax increases in a strict sense, the Murray-Ryan proposal would cost consumers some money, as in higher airport security fees that would be included in airplane ticket purchases.

Among the details of the bill are $6 billion in cuts to federal workers' retirement benefits and $6 billion in cuts to military pensions, according to Murray.

These and other new savings would replace some of the second round of automatic spending cuts, known as "sequestration," that were scheduled to begin in January.

Murray and other leading Democrats have been pushing for an extension of federal jobless benefits that expire later this month during weeks of budget negotiations.

She told reporters that such a provision is not part of the agreement but is being discussed by congressional leaders.

Also not addressed in this budget deal is the need to again raise U.S. borrowing authority sometime next year.

The reaction from at least one market-watcher was positive. "It is certainly a good start to what would be welcomed relief from the fiscal dysfunction that has defined Washington," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis.

Meanwhile, most Asian share markets had lurched lower overnight as investors booked profits on a range of once-crowded positions, but European stocks were holding their own after dropping on Tuesday.

The U.S. deal came as euro zone countries also edged closer to agreeing a long-awaited plan to close ailing banks and at least partly sharing the costs involved.

In the foreign-exhcnage market, the dollar was broadly firmer in reaction to the budget deal in Washington, though it struggled against the yen as a drop in the Nikkei in Tokyo drove up the Japanese currency.

Focus in European remained on the strong euro as it sat just off a six-week high versus the dollar at $1.3762 and a five-year high versus the yen hit on Tuesday.

Societe Generale FX strategist Alvin Tan said that with the euro zone making progress and the European Central Bank looking increasingly inclined to sit on its hands, the euro could well hit its highest level of the year.

"I'm afraid this euro squeeze is going to continue," Tan said. "The liquidity conditions are definitely tightening.

"There are the more macro reasons, but also the market had at the very least been expecting another LTRO (offering of cheap loans) by early next year and that is now in doubt."

NO TAPER TANTRUM

With the jury still out on a cut in Fed stimulus, European governments bond were sticking to tight ranges as U.S. Treasurys, the benchmark for global borrowing costs, edged back above 2.8 percent.

In any case, investors seem to have made peace with the idea the Fed will taper soon, if not next week then by March, and that the economy can withstand the move. They have decided that tapering is not tightening and an actual rate hike is a distant prospect. Eurodollar and Fed fund futures have not fully priced in a first rate rise until the end of 2015.

In commodity markets, gold came off a three-week high to stand at $1,255 an ounce, though that was still up from last week's trough of $1,211.44.

U.S. crude rose as traders mulled news of progress towards opening a pipeline that will transport oil from storage centers in the U.S. Midwest to refineries in the Gulf. The news presaged a further drawdown in U.S. crude oil inventories for a second straight week and kept NYMEX crude at $98.55 a barrel.

At the same time, the prospect of increased supply of Brent crude narrowed the spread between the two oil contracts to a month's low. Brent crude for January delivery was 5 cents higher at $109.42 a barrel.

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