World stock rally pauses in holiday-affected trade

By Richard Hubbard

LONDON (Reuters) - The dollar edged up against the yen on Monday and stocks held near last week's multi-year highs as the global economic outlook, brightened by strong U.S. jobs data, buoyed sentiment.

Brent crude oil futures hit their highest level in nearly a month after Israeli air strikes on a Syrian military facility over the weekend stoked worries about the risk of disruption to Middle East supplies.

However, with Japanese and British markets closed for public holidays, trading volumes were thin across all major asset classes.

The main moves were in the dollar against the yen where Friday's U.S. jobs report eased fears of a slowdown in the world's largest economy, setting the stage for the greenback to re-test the 100 yen level.

"The U.S. does seem to be in a cyclical recovery. It is outperforming all the rest of the major (developed) economies globally, and that can't be ignored," said Greg Matwejev, director of FX, Hedge Fund Sales and Trading for Newedge.

"We've probably got a better chance at making a crack at 100 now and I wouldn't be surprised in the coming sessions that we do see that happen."

U.S. employment rose more than expected in April, with 165,000 jobs created, and hiring was much stronger than previously thought in the previous two months. This eased concerns raised by other data which had pointed to the economy losing steam.

The dollar was up 0.4 percent at 99.39 yen, extending Friday's 1 percent gain. The yen has fallen steadily since the Bank of Japan announced a massive plan last month to boost the economy.

The dollar's rise was being helped by U.S. Treasury bond yields which jumped in reaction to the jobs report. The 10-year note yield was at 1.74 percent on Monday, having posted its biggest single-day rise since September 14 on Friday.

U.S. SHINES

Further evidence of the relative outperformance of the U.S economy emerged on Monday when a gauge of China's service sector, which accounted for 46 percent of gross domestic product in 2012, showed activity slowing in April.

An updated reading on business conditions across the euro zone last month suggested the region may be falling deeper into recession.

The Markit Eurozone Composite PMI, which gauges activity across thousands of companies, also showed Germany is now suffering a contraction in business activity that has long dogged France, Italy and Spain.

"The PMI suggests that, having eased in the first quarter of the year, the euro zone's economic downturn is likely to have gathered momentum again in the second quarter," said Chris Williamson, chief economist at Markit.

The euro was down 0.1 percent at $1.3106 after the data, well below last week's two-month high of $1.3243.

Analysts said the currency could drop further after the European Central Bank President Mario Draghi said last week that the bank was ready to cope with the consequences of cutting its deposit rate below the current zero percent.

Such a move would effectively mean charging banks to leave money overnight at the ECB, encouraging them to lend more and support the recession-hit euro zone.

"The risks are now tilted to the downside for euro/dollar and it could test $1.30," said Arne Lohmann Rasmussen, head of FX research at Danske Bank.

The prospect of further ECB rate cuts was supporting European stock markets though the UK holiday limited activity.

The euro zone's blue chip Euro STOXX 50 index was down 0.3 percent at 2,755 points, edging away from a near-two year peak of 2,764.17 hit after the U.S. jobs data. <.EU>

A rise in MSCI's broadest index of Asia-Pacific shares outside Japan of nearly one percent, led by gains in Australia's main share index, left the MSCI world equity index virtually unchanged.

Strong gains in U.S. stock index futures did point to sharp rise Wall Street later when trading resumes, even though the Dow Jones Industrials index and S&P 500 already at all-time closing highs on Friday.

OIL TENSION

Commodities were mostly adding to their recent gains on the U.S. jobs report but oil gained added momentum from developments in the Middle East.

Brent crude was up 0.4 percent to $104.65 a barrel, its highest in nearly a month after intelligence sources said Israel attacked Iranian-supplied missiles stored near the Syrian capital of Damascus on Friday and Sunday.

Israeli officials have said the raids were aimed at stopping Lebanon's Hezbollah, an ally of Iran, from acquiring weapons that could be used to strike Tel Aviv. Iran has denied its missiles were destined for Hezbollah and urged the region to unite against Israel.

U.S. oil traded up 61 cents at $96.22, after ending Friday with gains of around 1.7 percent. (Additional reporting by Jessica Mortimer; Editing by David Stamp)