U.S. budget optimism send shares, euro up

World shares hit 17-month highs and the euro surged on Wednesday on hopes that U.S. politicians will reach a budget deal and that further monetary stimulus will come from Japan.

European shares extended their recent rally in early trading with the FTSEurofirst 300 index <.FTEU3> near an 18-month high ahead of the German Ifo survey, which is likely to point to a gradual improvement in business conditions for December.

"What is important, and what is driving the market higher, is that the two parties (in the U.S.) are now in constructive discussions over specific tax levels and spending programs, and working towards a common middle ground," said Cameron Peacock, a strategist at IG Markets.

MSCI's world equity index <.MIWD00000PUS>, which is in its fifth week of gains, was up 0.3 percent at 342.29 points - a level which surpasses its peaks for this year and has not been seen since July 2011.

In Europe London's FTSE 100 , Frankfurt's DAX and France's CAC-40 indexes all rose around 0.3 percent in early trading.

Behind the rally is a view that, once the U.S. fiscal crisis is resolved, the massive monetary stimulus by the world's top central banks will lead to an expansion in economic growth for 2013, supporting equities at the expense of safe-haven bonds.

The Bank of Japan is widely expected to join in the growing activism of central banks to support growth by expanding its asset-buying program aggressively an the end of a two-day policy meeting on Thursday.

The prospect of extra stimulus sent Tokyo's Nikkei share average <.N225> up 2.4 percent on Wednesday and back through the 10,000 points for the first time since April.

The easier policy outlook also sent the yen to a 16-month low against the euro, while the dollar gained 0.2 percent on the Japanese currency to edge back towards its strongest level in 20-months of 84.48 yen hit on Monday.

The growing demand for riskier assets on the hopes for a U.S. budget deal also benefited the euro against the dollar and it touched a 7-1/2-month high of $1.3256.

"Unless U.S. fiscal cliff talks take an unexpected turn for the worse, we believe that EUR/USD will meet our 1.33 year-end target," analysts at BNP Paribas wrote in a note.

Commodities were in consolidation mode, however, as investors waited for a U.S. fiscal deal.

Oil held steady, with Brent crude rising about 10 cents to be just short of $109 a barrel at $108.80, and U.S. crude was little changed below $88 a barrel.

Copper was also flat at $8,017 a tonne. Copper has rallied almost 8 percent from mid-November and hit a two-month high a week ago, but has since lost some ground.

Gold rose 0.3 percent to around $1,675 an ounce, after falling to $1,661.01 on Tuesday, its lowest since August.

(Editing by Anna Willard)