LONDON (Reuters) - The euro and share markets staged big gains on Thursday as investors took heart from signs that Greece would complete a much needed private debt swap to avoid a chaotic default and that the U.S. economy would deliver more upbeat news.
Wall Street was also set to open higher .N ahead of weekly jobless claims data that are expected to confirm the strength of the domestic labor market.
But investors are likely to remain cautious ahead of a formal announcement on the Greek deal, as well as Friday's keenly-watched U.S. jobs report, while central banks are being closely monitored for signs they will keep promoting growth.
"This (Greece) has been the game of anticipation. I think it's likely to remain volatile but overall ... we would be expecting more upside potential moving into next week," Luca Solca, global head of European research at CA Cheuvreux, said.
The MSCI world equity index .MIWD00000PUS gained 0.8 percent to 326.61 after markets rose across Asia on the optimism over a Greek deal, while better economic data lifted U.S. markets on Wednesday.
The broad FTSE Eurofirst 300 .FTEU3 index of top European companies rose 1.3 percent to 1,072.31 with the banking sector .SX7P, which is most directly linked to Greece's debt worries through its sovereign debt holdings, adding over 2 percent.
Equity markets are recovering swiftly from a sharp downturn on Tuesday, when the MSCI world index saw its biggest one-day fall of the year, as the easier liquidity provided by the world's major central banks is put to work.
On Thursday the growing view that the Greek deal would get done [ID:nL5E8E847D] lifted assets from copper and gold to oil, along with commodity-linked currencies such as the Australian dollar, while the U.S. dollar took a back seat, although it rose against the Japanese yen.
The euro and the dollar were both higher against the yen after Japan's current account swung to a record deficit for the first time in three years in January, driving some short-term players to sell the Japanese currency.
The Greek deal and U.S. nonfarm payrolls, due on Friday, are seen as a test of whether markets can build on the optimism of recent months and overcome patchy growth figures that have dented sentiment.
The euro was up 0.6 percent to $1.3220, its biggest one-day gain in a week and well above a three-week low of $1.3096 touched on Wednesday.
However, with most of the euro area, except Germany, on the brink of recession, and the threat of debt contagion still alive, gains are expected to be limited.
German government bonds fell on all the optimism with the June futures contract down 26 ticks at 138.30. The more buoyant mood helped bring down the return investors seek on riskier government bonds, sending yields on 10-year Italian government bonds down 14 basis points to 4.8 percent, and easing the equivalent Spanish yield to 5.05 percent.
Market attention is switching back onto monetary policy settings after a U.S. report that the Federal Reserve is considering a new approach to asset purchases, while rumors surfaced during the Asian trading session that Chinese authorities may be considering a rate cut.
The European Central Bank is expected to signal after its monthly policy meeting that it has done its part in fighting the euro zone crisis after pumping more than 1 trillion euros into the banking system since the end of December.
"We don't expect any dramatic changes, but the inflation forecast for 2013, currently at 1.5 percent, should be watched closely," Derek Halpenny, European Head of Global Currency Research at Bank of Tokyo-Mitsubishi UFJ, Ltd said.
The Bank of England left its interest rates on hold at 0.5 percent, unchanged now for three years, and stayed with February's decision to buy an extra 50 billion pounds ($79 billion) of government bonds.
Central banks in South Korea, New Zealand and Indonesia all left key rates on hold at policy meetings on Thursday.
For a package of ECB graphics, click:
Euro zone debt crisis: r.reuters.com/hyb65p
Oil gained a lift from the Greek debt deal hopes, with prices for Brent crude staying above $124 a barrel also supported by continuing fears of supply disruptions from Iran.
Front-month Brent gained over $1 to $125.35 a barrel 5.13. U.S. crude was up 56 cents at $106.72 a barrel.
Spot gold up 1.0 percent on the day at $1,701.85 an ounce.
"Greece has certainly lent support to the euro, that in turn has spurred commodities, especially the dollar-denominated commodities to rally or certainly stabilize," said Tony Machacek, an energy broker at Bache Commodities.
($1 = 0.7622 euros)
($1 = 0.6367 British pounds)
Additional reporting by Chikako Mogi in Tokyo; editing by Patrick Graham/Ruth Pitchford