Europe, Asia shares rally, dollar dips on U.S. rate outlook

By Nigel Stephenson

LONDON (Reuters) - European shares paused on Monday after their strong start to the fourth quarter while the dollar dipped towards three-week lows, with investors unconvinced the U.S. Federal Reserve would raise interest rates this year.

China was again in focus as mainland shares jumped over 3 percent to seven-week highs and the yuan currency hit its strongest level since its surprise devaluation in August.

Chinese data may be the highlight of the week, with investors looking to trade figures on Tuesday to gauge the extent of the slowdown in the world's second-largest economy.

Despite a strong start to the fourth quarter for world stocks, investors remain concerned about the threat of slowing global growth even though central banks have pumped billions of dollars into their economies.

"This global economic slowdown would be less of an issue if it was not being made worse by deflationary pressures and did not occur at a time when confidence in central banks' ability to provide an effective solution is starting to be questionable," said Didier Saint-Georges, managing director and member of the investment committee at Carmignac.

The pan-European FTSEurofirst 300 stock index (FTEU3) fell 0.2 percent, reversing earlier gains, but held near one-month highs.

Germany's DAX (GDAXI), however, added 0.2 percent thanks largely to utilities RWE (DE:RWEG) and EON (DE:EONGn), which rose 11 percent and 7 percent respectively after a government review concluded they had put aside enough money to decommission their nuclear plants.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) was up 0.8 percent, extending an impressive 11 percent rise this month as investors unwound some of their long dollar, short commodity trades and emerging markets trades.

Wall Street looked set to open flat, according to index futures (ESc1).

Chinese shares rose after the central bank took fresh steps to inject liquidity into the struggling economy and said the stock market's correction "is almost over".

The CSI 300 index (CSI300) of the largest listed companies in Shanghai and Shenzhen rose 3.2 percent and the Shanghai Composite (SSEC) added 3.3 percent.

"Any sign of stimulus is being seized by the markets as a sign of stabilization and there is some bargain hunting, especially in the beaten down sectors, related to commodities," said Nicholas Yeo, head of equities (China/Hong Kong) at Aberdeen Asset Management with assets under management of $490.8 billion globally.

Japanese markets were closed for a holiday.

The dollar index (DXY), which measures the greenback against a basket of currencies, was down slightly and close to Friday's three-week low on expectations the Federal Reserve would not raise interest rates this year.

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This was despite a number of Fed officials saying in recent days that a first hike since 2006 could still come before the year is out. Vice Chairman Stanley Fischer said on Sunday a rate hike this year was "an expectation, not a commitment".

SOFT DATA

Instead, investors have focused on soft economic data, especially after weak U.S. jobs numbers last month, and the Fed's own concerns about global economic growth.

The euro was up 0.2 percent at $1.1380 and the yen 0.1 percent stronger at 120.11 to the dollar.

China's yuan firmed as far as 6.3187 to the dollar, its strongest since the Aug. 11 devaluation.

Oil prices rose after Kuwait's oil minister said economic growth and the removal of high-cost producers would lead to higher prices.

Brent crude (LCOc1), the global benchmark, traded 16 cents higher on the day at $52.82 a barrel, having settled at a three-month high on Friday.