By Angela Moon
NEW YORK (Reuters) - The euro dropped from a near two year-high against the dollar on Friday, pressured by a survey showing an unexpected fall in German business morale, while world shares hovered near five-year highs as Wall Street extended yet another day of gains.
The euro's decline was not dramatic, however. It stayed not far from a near two-year high touched earlier against a weak dollar.
Soft U.S. jobs and other data this week have bolstered the view that the Federal Reserve will not tamper with its huge bond-buying program until well into next year, triggering a drop in the dollar and lifting both shares and bonds.
There was an interruption on Friday, though, as a surprise dip in Germany's Ifo business index and soft euro zone lending data sent another reminder of the bloc's fragility a day after a disappointing PMI reading.
But many analysts say the euro can rise towards $1.40 as investors seek alternatives to a dollar hobbled by expectations the Federal Reserve will maintain its monetary stimulus.
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"Traders continue to make the euro their favorite anti-dollar trade in light of expectations the Fed will continue its QE (quantitative easing) program well into the start of next year," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
While equity markets in Asia and Europe fell, Wall Street started off on a higher note, setting the S&P 500 on track for a third consecutive week of gains.
Better-than-expected earnings from big tech companies on Thursday - Amazon Inc , Microsoft , and Zynga Inc - boosted investor confidence in an earnings season which has been slightly disappointing with the exception of Google Inc . Next week's earnings spotlight will be on tech companies like Apple Inc and Facebook Inc .
In Europe, worries about tighter cash markets in China and the impact of the strong euro on corporate earnings weighed on equity markets despite an acceleration in British third quarter GDP. The FTSEurofirst300 was down 0.1 percent.
MSCI's world share index, which tracks 45 countries, was down 0.1 percent but still near a five-year high.
On Wall Street, the Dow Jones industrial average was up 35.83 points, or 0.23 percent, at 15,544.37. The Standard & Poor's 500 Index was up 3.96 points, or 0.23 percent, at 1,756.03. The Nasdaq Composite Index was up 25.61 points, or 0.65 percent, at 3,954.57.
The euro fell 0.1 percent to $1.3795, below an earlier high of $1.3833, its strongest since November 2011.
The dollar edged up 0.1 percent against a currency basket to 79.252, off an earlier near nine-month low of 78.998.
After a choppy week for commodities markets, Brent crude slipped further below $107 a barrel on Friday on concern about higher supply and faltering demand. Brent crude for December was down 20 cents a barrel to $106.79, falling for a third day. U.S. crude oil was up 16 cents at $97.27, although still down around 3.5 percent on the week, its biggest weekly loss since June.
Gold eased on Friday as the dollar edged off its lows, but was still set for a second week of gains on the view that sluggish U.S. data would persuade the Fed to keep stimulus intact until well into 2014.
Spot gold fell 0.6 percent to $1,338.05 an ounce, but was still not too far from its highest level since September 20 of $1,351.61 hit on Thursday.
"We are certainly seeing some support this week, which is mainly due to external factors like the weakness of the dollar and dropping yields as the market tries to assess whether we will have tapering in coming months or not," said Credit Suisse analyst Karim Cherif.
U.S. Treasuries prices edged up on Friday as investors waited on new signs about the strength of the economy, which is key to the timing of when the Federal Reserve is likely to reduce the size of its bond purchase program.
Treasuries have been largely rangebound since Tuesday, when yields fell on data that showed employers hired fewer workers than expected in September, stoking fears the economy was slowing even before the government's 16-day shutdown.
The Fed is viewed as unlikely to change it purchase program from $85 billion a month when it holds its policy meeting next week, with most seeing the central bank likely to maintain the same rate of purchases until next March.
Benchmark 10-year notes were last up 2/32 in price to yield 2.51 percent. The yields have fallen from 3.00 percent on September 5, before the Fed surprised investors by leaving its bond purchase program unchanged.
(Reporting by Angela Moon; Editing by Nick Zieminski)