World stocks gain as Fed-fired volatility eases; dollar firm

By Richard Hubbard

LONDON (Reuters) - World shares were set to end a volatile week on a positive note on Friday and the dollar reached a 4-month high against the yen as worry dissipated about an end to the Federal Reserve's stimulus.

Volatility has eased as investors realise that scaling back the Fed's bond-buying programme, which will probably begin in the first quarter of next year, does not necessarily mean rates will rise soon afterwards.

"I think people have got the message," said Laurent Fransolet, head of European fixed-income strategy at Barclays. "Everyone is starting to differentiate between tapering and tightening."

Solid U.S. data has eased concern that weaker growth in China and the euro zone may set back the fragile global economic recovery. The data helped to bolster the optimistic tone, especially on world equity markets.

On Wall Street, the Dow Jones Industrial Index closed above 16,000 for the first time ever. Japan's Nikkei index climbed to near its highs for the year. The advance picked up across the rest of Asia, except for China.

Europe's share markets joined the trend. All the major European indices up as much as 0.5 percent in early trading.

The broad FTSE Eurofirst 300 index of top European shares had risen by 0.25 percent as a key barometer of investor sentiment, the Euro Stoxx 50 Volatility index dropped 3.6 percent to reach its lowest level since early 2007. A lower reading is a sign of rising confidence.

MSCI's world equity index was up 0.2 percent, although it was still likely to end the week lower.

"The markets have got a lot of liquidity and it's going to be a gentle lift upwards for equities," Michael Gallagher, managing director of IDEAGlobal. "We might see it slow waiting for the U.S. employment report and the December meeting of the Fed." DOLLAR CLIMBS The dollar reached a peak above 101.20 yen for the first time since July before settling just under 101 yen. The weaker yen helped encourage Japanese investors to buy stocks.

Bank of Japan Governor Haruhiko Kuroda gave his blessings to the move, saying the yen was not abnormally low and there was no sign of a bubble in shares.

At the same time, a swing higher in long-term U.S. Treasury yields was expanding the dollar's rate advantage over the yen. Yields on 10-year Treasuries were at 2.78 percent, compared to 0.65 percent for JGBs.

The U.S. dollar fared less well against the euro, which bounced on Thursday when European Central Bank President Mario Draghi shot down a report that the central bank was considering cutting a key interest rate below zero.

That lifted the common currency to $1.3490 from a one-week low of $1.3399. The euro extended its gains after the Munich-based think tank Ifo said German business morale rose more than forecast in November.

Currencies linked to commodities and global growth took a hit. The Canadian, New Zealand and Australian dollar all fell sharply.

Among commodities, Brent crude oil held near $110 a barrel. It had jumped more than $2 on Thursday to its highest in over a month.

The rally was fuelled by news of dwindling stocks and refinery glitches in the United States and Europe. Traders also kept an eye on talks between Western powers and Iran over its nuclear program.

U.S. oil was off 37 cents, but that followed a rise of $1.59 overnight.

After reaching a 4-1/2-month low of $1,236.29 an ounce on Thursday, gold recovered slightly to $1,243.80. It remains on course for its biggest weekly drop in more than two months. (Editing by Larry King)