Global Markets - Post-Fed dollar rally steadies, stocks level near highs

By Atul Prakash

LONDON (Reuters) - The dollar's post-Federal Reserve rally steadied on Friday and European shares traded near 11-month highs as investors adjusted their portfolios before year-end to face the prospect of a faster-than-expected pace of U.S. rate hikes next year.

Japanese shares rose 0.7 percent after scaling a one-year peak on the export prospects from a weaker yen. World stocks as measured by the MSCI world equity index, which tracks shares in 46 countries, were up 0.1 percent.

Global financial markets have been choppy since the Fed projected three more interest rates hikes next year at its meeting on Wednesday, when it also raised rates for the first time in a year.

The dollar has since almost hit parity with the euro.

The dollar index, which tracks the greenback against a basket of six major rival currencies, stood at 103.000 after hitting a 14-year high of 103.560 on Thursday, when it gained 1.2 percent to record its biggest daily percentage gain in nearly six months.

European shares steadied in morning dealings, but were heading for a second straight week of gains, with the prospect of more mergers and acquisitions underpinning sentiment.

Analysts and traders said that the European stock market's outlook remained broadly positive in the medium term, with major stock indexes seen setting fresh highs.

"Stocks are continuing to get a boost from a weaker euro and the notion that the United States, the world's largest economy, will experience an uptick in growth once President-elect (Donald) Trump has started implementing his new policies," Markus Huber, trader at City of London Markets, said.

European infrastructure and commodities firms have been in demand on expectations that Trump's pledge to heavily invest in infrastructure projects would boost the sectors.

The possibility of the Fed tightening monetary policy drove the benchmark U.S. Treasury 10-year yield to its highest level in more than two years.

In Europe, however, two-year German government bond yields dropped to fresh record lows after the European Central Bank's recent tweaks to its asset-purchase programme.

Earlier this month, the ECB said it would reconfigure its bond-buying scheme at the start of 2017, introducing changes that suggested it would focus its purchases on the short end of euro zone government bonds.

In commodities, a stronger dollar and signs of mounting supply in London Metal Exchange warehouses pushed copper prices lower and hurt European mining stocks.

Oil prices stabilised as evidence rose that producers in the Middle East were informing customers of upcoming supply cuts as part of a coordinated effort to drain a global glut.

Asian stocks were tepid, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.1 percent, after falling 1.8 percent on Thursday.

(Additional reporting by Abhinav Ramnarayan in London and Shinichi Saoshiro in Tokyo Editing by Jeremy Gaunt.Editing by Jeremy Gaunt)