European shares rose towards five-year highs on Monday and the dollar was under pressure on a growing conviction that the U.S. Federal Reserve will keep monetary policy loose this week, and for some time to come.
The Fed's rate-setting committee ends a two-day gathering on Wednesday. The chances it will trim its $85 billion monthly bond buying are seen as miniscule given the uncertainty created by this month's government shutdown in Washington.
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A run of upbeat news on corporate earnings on both sides of the Atlantic was also supporting the positive sentiment in global equity markets, where the widely tracked S&P 500 index set another record high at the end of last week.
"Monday has started off with a follow-through from Friday with a small 'risk on' bias," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.
Most market participants expect the U.S. central bank to delay tapering its stimulus until at least March next year and are looking for the Fed to confirm this at end of its meeting.
"It's the first Fed meeting since the government shutdown in the U.S. so any clues on when they may potentially taper will be welcomed by the market," Matwejev said.
In European trading, the broad FTSEurofirst 300 index was up 0.2 percent, building on a rise of 0.6 percent last week when it registered a third straight week of gains. It climbed to a five-year high last week.
Earlier in Asia Japan's Nikkei climbed 2.2 percent, clawing back most of Friday's 2.7 percent drop, while Australian shares put on 1.0 percent to end at a five-year high.
China's main share index, the CSI300, bucked the trend to post a fifth straight loss as concerns about the government's efforts to cool inflation and a runaway property market with higher short-term rates weighed on sentiment.
However, the MSCI world equity index, which share moves in 45 countries, was up 0.3 percent for a fourth day of gains as it heads toward highs last seen in 2008.
In the currency markets the dollar remained under pressure as expectations of a shift in Fed policy get pushed back further into 2014, when the bank is due to be led by a new governor, Janet Yellen, who is seen as unlikely to seek any early tightening.
Against a basket of major currencies, the greenback was trading near its lowest levels of the year at 79.18, with the euro edging higher to reach $1.3810.
The longer the Fed keeps its policy loose, the more U.S. yields stay low, which makes the dollar less attractive.
The yield on the benchmark 10-year Treasury bond did edge higher on Monday, though at 2.52 percent it is well below a peak of 3.0 percent recorded on Sept. 5, when markets still believed the Fed was about to change its policy.
"The FOMC should be a non-event... the Washington debates cloud the growth outlook, so forget about tapering," analysts at JPMorgan wrote in a client note, adding the April 2014 meeting looked like the soonest any tapering would be announced.
German government bonds were largely unchanged though did see some slight selling pressure as the region's equity market tracked higher.
The German Bund futures contract was 6 ticks lower at 141.00, not far from the two-month peak of 141.22 hit last week , while 10-year cash bond yields were 0.7 basis point up at 1.76 percent.
Among lower-rated euro zone bonds, Italian 10-year yields were 1.1 basis points up at 4.23 percent ahead of sales in Rome this week of 9 billon euros of debt. Equivalent Spanish yields were up by a similar amount at 4.16 percent.
The likelihood that Fed cash will keep flowing into the financial system for longer than many had anticipated also supported gold and other metal markets, but after strong gains last week most markets were wary of pushing higher.
Spot gold was unchanged at $1,351.50 an ounce, still not far off a five-week high of $1,355.20 set on Friday. Copper was 0.4 percent up at $7,220 a tonne.
In the oil market, the positive sentiment flowing from other risk assets encouraged a slight rebound on Monday, with the global oil benchmark rising 91 cents to $107.86 a barrel.
Fears of a slowdown in China's economy had led to sharp falls last week, with Brent crude dropping 2.7 percent for its biggest weekly loss in a month.