The dollar fell to six-week lows on Monday as recent weak U.S. data cast doubt on the pace of monetary tightening, while prospects for a new reforming government in Italy sent its bond yields to their lowest since 2006.
World stocks rose to 3-1/2 week highs, helped by encouraging news on Chinese lending.
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A run of weak U.S. data, including an unexpected fall in January manufacturing output on Friday, has caused some investors to revise their expectations of how fast the Federal Reserve will scale back stimulus and tighten monetary policy.
"There's been a very patchy data outlook for the past six weeks to two months and expectations of a rate rise from the Fed have been curtailed," said Peter Kinsella, strategist with Commerzbank in London.
Higher-yielding emerging markets, which have suffered as U.S. investors bring their money home in anticipation of tapering, rose to 3-1/2 week highs on Monday.
Data at the weekend showed Chinese banks disbursed the highest volume of loans in any month in four years in January, a surge that suggests the world's second-biggest economy may not be cooling as much as some fear.
The dollar hit a six-week low against a basket of currencies and three-week lows against the euro following recent upbeat euro zone economic readings.
It edged up against the yen after data showed Japan's economy grew just 0.3 percent in the fourth quarter, confounding forecasts of a 0.7 percent gain.
U.S. markets were shut for a holiday on Monday.
In Europe, Italian President Giorgio Napolitano asked centre-left leader Matteo Renzi to form a new government after former Prime Minister Enrico Letta resigned last week.
Ratings agency Moody's lifted Italy's ratings outlook to stable from negative late on Friday, reinforcing optimism that a new government will be able to push through reforms to help lift economic growth after years of stagnation.
The yield on Italy's benchmark 10-year government bond hit an eight-year low of 3.622 percent.
"Investors are quite sanguine about the economic and political situation in peripheral Europe, and that's a very positive signal," said David Thebault, head of quantitative sales trading at Global Equities. "Ten-year bond yields continue to fall across the board, a sign of stability which has prompted a lot of investors to come back."
Euro zone finance ministers meet in Brussels on Monday.
European stocks also reached 3-1/2 week highs, though Italy's FTSE MIB equity index, which outperformed with a 1.6 percent gain on Friday, dipped 0.17 percent.
Safe-haven Bund futures fell 14 ticks.
The lower dollar spurred gold to a fresh three-month peak at $1,329.55 before it trimmed gains to $1,326.50.
In energy markets, Brent oil futures fell 12 cents to $108.96 a barrel, while U.S. crude firmed 44 cents to $100.74.