World stocks hold near 1-1/2 year highs before U.S. jobs data

By Alistair Smout

LONDON (Reuters) - World stocks (MIWD00000PUS) held near 1-1/2 year highs and the dollar moved up from a three-week low on Friday, with investors looking to upcoming U.S. jobs data to provide clues on the pace of U.S. interest rate rises this year.

MSCI's gauge of the world's stock markets hit its highest since July 2015, taking its gains so far this year to 1.7 percent, helped by this week's generally upbeat economic readings in the U.S., China and Europe.

Asian shares recovered to four-week highs, while the pan-European STOXX 600 (STOXX) dipped 0.2 percent, just 0.6 percent off a 1-year high hit this week.

A Reuters survey of economists signaled that U.S. employers were likely to have maintained a solid pace of hiring in December while raising wages, putting the economy on a path to stronger growth and further interest rate increases this year.

Non-farm payrolls probably increased by 178,000 jobs last month, the survey showed.

Federal Reserve minutes from December released this week showed that almost all Fed policymakers thought the economy could grow more quickly because of fiscal stimulus and many were eyeing faster interest rate rises than previously expected.

Despite this, investors have scaled back expectations for the number of rate rises this year since December, and the dollar is down from this week's 14-year high.

The currency slumped 1.6 percent on Thursday to a three-week low of 115.04 yen , its biggest fall for five months. It bounced back 0.6 percent on Friday to 116 yen.

Weaker-than-expected private-sector ADP payrolls data on Thursday contributed to the dip in the dollar, despite strong data elsewhere. Investors were looking to today's jobs figures to see if the bounceback for the dollar could be sustained.

"It's likely that a stronger jobs number will, in the shorter term, strengthen the dollar. But (soon) people will start questioning how much of a strong dollar the Fed can stomach," ETF Securities' head of research and investment strategy, James Butterfill, said.

"Given the sell-off in the dollar, there could be appreciation over the next few weeks, but in the coming few months we could see further dollar weakness."

The recent surge in the dollar and its borrowing costs sparked by Donald Trump's election victory has eased, with the U.S. 10-year yield slipping to one-month lows.

The dollar did bounce back slightly against the yuan , which gave up some of the massive gains made in the previous two days despite Friday's strong midpoint fixing by China's central bank.

In Asia, MSCI's ex-Japan Asia-Pacific shares index (MIAPJ0000PUS) touched a four-week high, while Japan's Nikkei (N225), one of the best performers since Trump's win on Nov. 8, dropped 0.3 percent.

"What's going on is a correction of the 'Trump trade' since the election. The markets have been trying to fully price in his policies just based on hopes," Standard Chartered's executive director of finance, Koichi Yoshikawa, said.

"From now on, it's not going to be a simple one-way bet."

Trump's victory had sparked a major realignment in markets. Expectations that his administration will bring tax cuts, higher spending and deregulation have boosted U.S. bond yields and the dollar, to the detriment of many emerging economies that have benefited from cheap dollar funding and had attracted trillions of dollars from investors shunning low U.S. yields.

Already under pressure as the Trump rally wanes, the dollar extended losses on Thursday as China stepped up efforts to support the yuan, sparking speculation that it wants a firm grip on the currency ahead of Trump's Jan. 20 inauguration.

The cost of borrowing the yuan in Hong Kong, the main offshore yuan trading center, sky-rocketed, making it too costly for speculators to sell the yuan against the dollar.

The offshore yuan has gained more than 2 percent in the last two sessions, its biggest two-day gain on record, to a two-month high of 6.7833 per dollar before it eased back about 1 percent in Asia on Friday to 6.8610.

Having posted its biggest gain for 7 months, of 1.1 percent, in the previous session, it fetched $1.0589 on Friday.

The dollar's index against a basket of six major currencies (DXY) <=USD> was up 0.1 percent at 101.640, down more than two percent from Tuesday's 14-year high of 103.82.

Investors also closed short positions in U.S. bonds, one of the most popular plays since the election because Trump's policies are seen as stoking inflation.

Oil prices were steady as Saudi Arabia and Abu Dhabi stared promised supply cuts, but doubts that all producers will implement output reductions agreed in a landmark OPEC deal last year kept markets from rising further.

International benchmark Brent crude futures (LCOc1) traded up 0.2 percent at $56.97 per barrel.