By Richard Hubbard
LONDON (Reuters) - The dollar bounced higher against the yen and Japanese stocks led a rise in world shares on Monday as signs of economic momentum in the United States and Japan outweighed worries about a slowdown in China.
A central bank forecast that France's economy will grow slightly in the second quarter and a rise in French factory output helped underline the sense of recovery, as did better euro zone investor sentiment for June.
"The story is one of slow but steady growth, moving in the right direction but with headwinds still visible for the United States, euro area and China," said Sarah Hewin, senior economist at Standard Chartered Bank.
The improving outlook for major developed economies lifted MSCI's world equity index by 0.25 percent, its third straight day of gains, with U.S. stock futures pointing to further rises when Wall St opens.
But investors are ultra-sensitive to the timing of any slowdown in the Federal Reserve's huge bond-buying programme and markets are expected to remain volatile as each new data report is closely scrutinised for hints of when it may begin.
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Last Friday's monthly jobs report, seen as the main gauge of future Fed action, offered little in the way of new clues, and the spotlight has shifted to this week's retail sales and factory activity numbers and next week's Fed policy meeting.
"(The jobs data) hasn't changed the market's view much on the timing of Fed tapering," said Kasper Kirkegaard, currency strategist at Danske Bank.
The solid growth implied by the 175,000 new jobs created in May in the face of ongoing government cutbacks has helped the dollar recover some of its recent losses.
The greenback gained 1.4 percent to 98.90 yen, extending a recovery from two-month lows hit on Friday. Against a basket of major currencies, the dollar rose 0.25 percent to 81.87 after suffering its biggest weekly fall since January 2012 last week.
The yen's fall, which improves the outlook for the country's exporters, and data showing the economy growing at a quicker pace than previously estimated, lifted the Nikkei index by 4.9 percent for its biggest one-day gain since March 2011.
The Nikkei has now swung by more than 3 percent in all but two of the last 11 sessions, five of those by more than 4 percent, making it one of the most volatile periods in Japanese stocks since the height of the financial crisis in 2008.
Japanese data on Monday showed the world's third-biggest economy grew at an annualised 4.1 percent rate in the first quarter, better than the initial estimate of 3.5 percent. That will help reassure nervous investors that Prime Minister Shinzo Abe's bold stimulus policies are having an impact.
CHINA STUMBLES
A batch of Chinese data at the weekend suggesting the world's No. 2 economy weakened slightly in May undermined some of the positive sentiment by raising questions around Beijing's 7.5 percent growth forecast for this year.
Chinese imports fell 0.3 percent against expectations for a 6 percent rise, and exports posted their lowest annual growth rate in almost a year in May, at 1 percent. Imports of major metals such as copper and aluminium fell at double-digit rates.
MSCI's broad index of Asia-Pacific shares ended down 0.35 percent after the data although China's markets were closed for a holiday and Hong Kong shares ended higher.
European shares were flat by midday having first fallen when mining stocks took a hit from the weak Chinese data.
"China is the elephant in the room. (The data) shows that real growth in the country is at best 5 percent right now, which means the growth component of the earnings of companies needs to be adjusted," Saxo Bank strategist Steen Jakobsen said.
The combination of solid U.S. data and soft Chinese figures gave investors an incentive to sell higher-yielding, growth-linked currencies like the Australian dollar, which touched a 20-month low of 93.93 U.S. cents.
Key commodity prices also suffered from the signs of weaker Chinese demand. Brent crude dipped toward $104 per barrel and copper touched a three week low of $7,137 a tonne.
(Additional reporting by Jessica Mortimer and David Brett; Editing by Catherine Evans)