LONDON, (Reuters) – World stocks are set to end the year at their highest levels in 28 months as investors gear up for continued risk-taking into 2011, prompted by a wilting dollar and narrowing yields on safe-haven U.S. bonds.
U.S. figures pointing to stronger momentum in the world’s biggest economy failed to rouse the greenback, which slipped on Friday to trade at its weakest against its basket of major currencies in nearly three weeks.
Factory activity in the Midwest expanded in December at its fastest pace in over 22 years, while pending sales of previous owned homes rose more than expected in November. The country’s stubbornly high unemployment rate also showed signs of easing.
Notwithstanding more upbeat U.S. economic prospects, the Federal Reserve is expected to keep monetary conditions ultra-loose to maintain the pace of recovery, which should keep the dollar on the back foot through the first quarter of 2011.
“In many ways 2010 is ending on a similar note to 2009, with markets rallying on hopes of economic recovery. This is certainly in line with our view of the world economy,” said Keith Wade, chief economist at Schroders.
“However, we also recognize that the U.S. is simply kicking the can down the road by avoiding fiscal consolidation. Markets are also far more cautious about the scope for policymakers to remove support than a year ago.”
The International Monetary Fund (IMF) said it expects a two-speed global recovery to extend into 2011 with developing economies growing slowly while emerging markets power ahead.
World stocks drifted up 0.2 percent to their strongest levels since September 2008 and are on track to end the year 10 percent higher.
European shares, heading for an 8-percent gain this year, dipped slightly in light trade on the last trading day of 2010 with several regional markets closed.
Asian stocks end the year 15 percent higher, the prime beneficiaries of record low interest rates in much of the developed world.
Emerging markets have surged 16 percent, though the dominant BRIC economies of Brazil, Russia, India and China have underperformed.
Investors remain fretful about the debt situation in the European Union after Italy’s failure on Thursday to sell part of its planned offer of bonds.
The euro edged up to a two-week high against the dollar on year-end buying by central banks but is set to end 2010 weaker by 7 percent against the dollar.
Market confidence in the common currency was bruised this year by emergency rescues for debt-laden Ireland and Greece.
Investors are seeking the relative safety of the Swiss franc, which hovers at a record peak against the euro.
The dollar has fared little better against the franc, languishing at a new record low on the last day of the year.
China’s tightly managed yuan, a source of irritation for U.S. lawmakers who say it is kept artificially weak, closed up 3.6 percent against the dollar this year.
The yuan is near its highest level since the currency’s landmark devaluation in July 2005.
March Bund futures were 59 ticks higher at 125.50 while emerging sovereign spreads traded 5 basis points tighter.
Commodity prices remained well supported, with copper ending the year at a record high and oil poised to gain more than 12 percent in 2010 with an average price of nearly $80 a barrel – the second highest on record.