LONDON (Reuters) - The dollar hit a nine-year high and stocks worldwide headed for their first back-to-back rise of the year on Thursday, bolstered by Federal Reserve confidence in the U.S. economy and hopes of aggressive new stimulus in Europe.
Wall Street was expected to start the day on the front foot, with future's markets pointing to gains of 0.9-1.0 percent for the S&P 500 ESc1 and Dow Jones Industrial 1YMc1 after stocks snapped a five-day fall the previous session.
Steadier oil prices also encouraged risk appetite and helped nudge U.S. and German government bond yields off recent lows but more soft German data and the dollar's upward march left the euro within a whisker of its 1999 starting point.
Expectations for more ECB stimulus this month were reinforced by data on Wednesday showing euro zone consumer prices fell in December for the first time since 2009. Minutes of a Fed meeting released the same day supported the view it will raise rates this year.
It would be the Fed's first hike in almost a decade, putting it in sharp contrast with other major economies that are still struggling for growth.
The dollar, measured against six other top currencies .DXY hit its highest since December 2005. The euro slid to $1.1760, not far from the level where it first traded in 1999, $1.1747.
As well as ECB money-printing bets, the euro was also being forced down by jitters about Greece leaving the currency union, said Ian Stannard, head of European FX Strategy at Morgan Stanley.
"Irrevocability is central to the euro," Stannard said. "If that is called into question it changes the nature of the euro and that is now at the heart of the debate."
Europe's stock markets <0#.INDEXE> rose sharply: London's FTSE .FTSE jumped 1.9 percent, Frankfurt's DAX .GDAXI 1.7 percent and Paris's CAC 40 .FCHI 2.1 percent, the biggest gain for each in three weeks.
The sudden return of global risk appetite also lifted emerging market shares .MSCIEF by 1.5 percent, with Russian stocks surging .IRTS 7 percent, and drove down yields on government bonds from the euro zone periphery. [GVD/EUR]
The latter got a boost on Wednesday when German Chancellor Angela Merkel said she wanted Greece to stay in the euro zone, though she made it clear she expects it to live up to the terms of its bailout whatever happens in this month's elections.
Ahead of Friday's closely watched U.S. non-farm payrolls figures, unemployment claims dropped 4,000 on the week to add to signs of a strengthening labour market.
More evidence the ECB might use its last policy tool - government bond buying, known as quantitative easing (QE) - came from German industrial orders, which fell 2.4 percent in November, more than expected.
For sceptics of QE, however, Japan saw household confidence drop in December to below levels seen before its central bank ramped up stimulus two years ago.
In Britain, another country which used bond purchases to prop up the economy, economic growth is showing signs of slowing and the pound fell to an 18-month low against the dollar on Thursday.
It recovered some ground after the Bank of England kept rates on hold at a policy meeting and last hovered at $1.5070 GBP=D4, down 0.3 percent on the day. [FRX/]
The euro last fetched $1.1770 EUR=, its lowest since December 2005.
Japan's yen JPY= also weakened, which helped Tokyo's Nikkei .N225 outperform its Asian peers. It gained 1.9 percent, versus 1.4 percent for MSCI's regional share index. .MIAPJ0000PUS
Oil, the other main focus for global investors, having halved in price over the last six months, steadied at $51 a barrel.[O/R]
"We believe that the market is testing water to find where the bottom of crude oil is and it seems for now, $50 is the limit for Brent," Phillips Futures analyst Daniel Ang said in a daily note.
Safe-haven gold XAU= dropped back towards $1,200 an ounce as outflows from the top bullion-backed SPDR fund (GLD) added to the pressure of the stronger dollar. [GOL/]
Editing by Larry King and Susan Fenton