Global stocks rise, dollar falls as U.S. data weigh

By Richard Leong

NEW YORK (Reuters) - World shares rose to near 3-1/2 month highs on Thursday, following hints that global growth engine China is eyeing new support for its economy, while mildly disappointing U.S. data weakened the dollar.

Investors were heartened by comments from German Chancellor Angela Merkel that appeared to back the European Central bank's efforts to fight the euro zone crisis.

"The decline in Spanish yields off of that has been a big boon to the market," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

A small unexpected rise in U.S. jobless claims and a surprise drop in housing starts renewed expectations the Federal Reserve would engage in a third round of large-scale bond purchases, dubbed QE3, to help the sluggish economy, spurring a rebound in safe-haven U.S. and German government bonds.

A report from the Philadelphia Federal Reserve also signaled business contraction in the U.S. Mid-Atlantic region in August, though it was milder than in July.

"We are still pricing in QE3," said Ellis Phifer, senior market analyst at Raymond James in Memphis, Tennessee. "If the numbers are bad, stimulus will be closer."

Other markets were holding in recent ranges as traders await possible policy action from U.S., European and Chinese central bankers.

"The markets in aggregate are in neutral right now," said Lawrence Creatura, co-portfolio manager of the Federated Clover Small Value Fund in Rochester, New York.