By Richard Hubbard
LONDON (Reuters) - World shares headed for a second week of gains and the euro its best week since early February on Friday as mounting evidence of a growing U.S. recovery encouraged demand for riskier assets.
But the dollar was taking a breather for a second day after its recent sprint saw it touch a seven-month high against a basket of major currencies on Thursday.
Investors have been encouraged back into markets for riskier assets this month as data on U.S. jobs, retail sales and factory output showed the recovery in the world's largest economy gaining momentum, despite tax rises and government spending cuts.
A lack of signs of inflation in the numbers has also eased fears the Federal Reserve would need to consider an early exit from its aggressive quantitative easing (QE) policy that has helped support asset prices around the world.
"I think (the Fed) will continue easing at $85 billion a month, so you have good economic data and still ongoing QE," said Thomas Costerg, an economist at Standard Chartered Bank.
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The encouraging outlook has seen the Dow Jones Industrial index set record highs over the past 10-days to post its best winning streak since late 1996.
European shares have tracked U.S. equities higher, adding another 1 percent this week to return to mid-2008 levels, while MSCI's all-world index, which tracks 9,000 stocks in 45 countries, has gained a solid 6.75 percent this year so far.
Europe's broad FTSEurofirst 300 index, which is on course for its fourth weekly rise, was mostly steady on Friday near the 4-1/2 year peak. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were flat to down 0.2 percent.
Demand for risk assets is not confined to stocks. Growth and recovery-linked currencies such as the euro, the Australian dollar, Brazil's real, the Mexican peso and Russia's rouble are all up this week.
The European single currency was up 0.3 percent at $1.3050 on Friday, recovering from Thursday's three-month low of $1.2911 to show a second consecutive weekly gain against the dollar.
DEBT STABILITY
Europe's crisis-sensitive bond markets have also remained calm despite increasing fears that Italy's political stalemate may mean new elections in October which could result in an anti-austerity party or coalition taking charge.
Italian bond yields were creeping up in cautious trading on Friday as the country's parliament convened for the first time since last month's vote, with parties still deadlocked over forming a government.
"If there is no capable government any time soon ... (Italian bonds) should come under pressure again," said Viola Julien, a fixed income analyst at Helaba Landesbank Hessen-Thueringen.
Italian 10-year yields were 3 basis points higher on the day at 4.67 percent.
Bond investors were showing little reaction to developments at a summit of 27 European Union leaders in Brussels, which signalled support for slightly more growth-friendly spending policies after French President Francois Hollande challenged German-driven fiscal austerity.
U.S. Treasury bonds, like the dollar, were little changed as investors waited for another wave of data due later, which includes consumer prices at 1230 GMT, industrial output at 1315 GMT and consumer sentiment at 1355 GMT.
Against a basket of major currencies the greenback eased about 0.25 percent but stayed close to a seven-month high touched on Thursday. The 10-year Treasury note yield was steady at 2.035 percent.
JAPAN SURGE
The yen edged higher against the dollar following approval by the Japanese parliament of Haruhiko Kuroda as the next governor of the Bank of Japan. Markets expect the BOJ under Kuroda to take more aggressive easing measures, maybe as soon as its next policy meeting on April 3-4.
Kuroda's appointment also sent Japan's Nikkei stock average up 1.3 percent to a new 4-1/2-year peak, while the MSCI's index of Asia-Pacific shares outside Japan also rose 0.4 percent.
Meanwhile the British pound gained on the dollar after the outgoing Bank of England Governor Mervyn King said the bank was not seeking a further depreciation in sterling and that the currency was now properly valued.
The pound gained 0.45 percent to $1.5133, well clear of a 33-month trough of $1.4832 set earlier in the week.
Commodity markets were also drawing strength from the better U.S. economic outlook with U.S. crude oil up 0.1 percent to $93.15 a barrel while Brent rose 0.3 percent to $109.30.
London copper was little changed at $7,800 a tonne as the sign of recovery in the global economy were offset by muted buying from top consumer China.
(Additional reporting by Marc Jones and Marius Zaharia; Editing by Peter Graff)