GLOBAL MARKETS-Euro extends rally, world stocks hover at 20-month highs

Fri Jan 11, 2013 5:39pm GMT

* World shares near 20-month high on global recovery hopes

* Euro rises to highest in nine months vs dollar

* Risk appetite curbs appeal of U.S., German govt debt

* Higher Chinese inflation data knock oil prices

By Richard Leong

NEW YORK, Jan 11 (Reuters) - The euro on Friday rose against the dollar to its highest since April in the wake of encouraging remarks from the head of the European Central Bank, while an improving economic outlook held world stock prices near a 20-month high.

A massive stimulus plan in Japan also boosted optimism about future business activity, but worries persisted about global demand and a possible drag from the debt ceiling fight in Washington, spurring selling in oil and basic metals.

As stocks and the euro gained appeal, investors trimmed back their safe-haven holdings of U.S. and German government debt.

"Equities are very overdue for a rest but that shouldn't make people throw in the towel in my opinion (as) they will continue to be supported by central banks' very accommodative policies," said Edward Page Croft, managing director at investment advisory firm Stockopedia.

While Japan aims to jumpstart its economy, U.S. and European central bankers have talked up the prospects for their economies in the past 24 hours.

Philadelphia Federal Reserve Charles Plosser on Friday repeated his outlook that the U.S. economy will likely grow about 3 percent in 2013, bringing the jobless rate down to 7 percent by year-end. Plosser's remarks followed mildly upbeat comments from St. Louis Fed chief James Bullard on Thursday.

Comments by ECB President Mario Draghi following the central bank's policy meeting on Thursday, suggesting Europe's economy is set for a recovery in 2013, have raised bets that global growth might gather momentum this year.

The MSCI index of world shares held steady at 349.74 after rising earlier to 350.15, the highest level since May 2011. It was on track for a weekly gain of 0.56 percent, following a 3.11 percent rise last week.

On Wall Street, the three major stock indexes slipped despite record earnings from Wells Fargo, the No. 4 U.S. bank. The Standard & Poor's 500 index dialed back from its five-year closing high on Thursday but was still poised to eke out a weekly increase of 0.23 percent.

The Dow Jones industrial average was down 0.87 points, or 0.01 percent, at 13,470.35. The S&P 500 was down 2.76 points, or 0.19 percent, at 1,469.36. The Nasdaq Composite Index was down 4.34 points, or 0.14 percent, at 3,117.41.

The solid start in the U.S. stock market likely resulted from a flood of cash from fund managers scouring for returns in the current low interest rate climate. Investors in U.S.-based funds poured $7.53 billion into stock mutual funds, the most since 2001, data from Thomson Reuters' Lipper service showed on Thursday.

Europe's FTSEurofirst 300 index of top companies across the region also neared levels last seen in March 2011 shortly after the ECB decision and was consolidating those gains on Friday. It slipped 0.17 percent at 1,632.70, bringing its weekly decline to 0.39 percent.

In Tokyo, the Nikkei index closed 1.4 percent higher at 10,801.57 for a ninth straight week of gains, the longest such streak since 1998.

The yield on benchmark U.S. 10-year Treasury notes edged up to 1.91 percent, which was below an eight-month high near 1.98 percent set a week ago.

German Bund futures were down 37 basis points at 142.32 after hitting their lowest level since November earlier.

In the currency market, the euro extended Thursday's rally against the dollar, rising 0.6 percent to $1.3350 after touching $1.3365 earlier, its highest since April.

The euro was on track for its strongest weekly gain against the dollar in nearly four months.

The greenback however strengthened against the yen, rising 0.35 percent to 89.10 yen. It touched a 2-1/2-year high at 89.44 yen earlier after the Japanese government agreed a $117 billion spending boost for the economy, and new Prime Minister Shinzo Abe stepped up pressure on the Bank of Japan to ease monetary policy more aggressively.

The BOJ is likely to adopt a 2 percent inflation target at its Jan. 21-22 meeting, double the current goal, and will consider more purchases of government debt to achieve the target, sources told Reuters this week.

OIL PULLBACK

In the commodity markets, oil prices were slipping as traders adjusted to sluggish global growth, which has prompted Saudi Arabia, the world's biggest exporter, to cut back supplies.

Data on Friday showing China's annual consumer inflation accelerated to a seven-month high of 2.5 percent in December also dampened demand as it reduced the likelihood of the central bank easing monetary policy to boost activity.

Brent crude futures fell $1.85 or 1.65 percent a barrel to $110.05 while U.S. oil futures shed 69 cents or 0.74 percent at $93.13.

On the week, Brent was poised for its first decline in five weeks, losing 1.1 percent, while U.S. oil futures were on track to cling to a slim 0.05 percent gain.

Gold prices fell 0.92 percent at $1,659.25 an ounce as the firmer tone to the dollar prompted some buyers to cash in gains after the metal's biggest one-day rise so far this year. On the week, bullion managed a rise of 0.19 percent.

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