Investors bet on Friday on a U.S. interest rate cut to spur slowing economic growth, lifting most world stock markets and dragging the dollar to record lows, but the price of oil hit an all-time high, adding more strains.
Gold also touched a new 28-year high on the weak dollar.
Oil prices shot up to record highs on heightened tension between the United States and Iran and on worries over energy supply shortages ahead of the northern hemisphere winter.
U.S. crude for December jumped to $92.22 a barrel before easing a bit. It has risen about 50 percent this year.
The United States slapped new sanctions on Iran and accused its Revolutionary Guard of spreading weapons of mass destruction, but Russia said such moves only forced Tehran into a corner over its nuclear program.
Investors have generally shrugged off higher oil prices over the past few years, but the latest rises come as some sectors of the world economy, particularly the United States, are slowing. Higher oil prices could dampened this further.
A series of poor U.S. economic reports, meanwhile, has built near universal expectations that the U.S. Federal Reserve will cut interest rates by at least 25 basis points at its meeting next week, if not before. It cut by 50 bps in September.
Everybody is convinced that we are getting a cut of 25 basis points, and some might even speculate whether the Fed could move by 50, said Niels Christensen, FX strategist at Nordea.
MSCI's main world stock index was up half a percent while its emerging market counterpart gained 1.2 percent and its Asia ex-Japan index hit a record high.
Europe, however, was down on mixed corporate news. The FTSEurofirst 300 was off 0.2 percent.
Earlier, Japan's Nikkei average ended 1.36 percent, or 221.46 points, higher at 16,505.63. The broader TOPIX index was up 1.7 percent at 1,573.97.
NEW DOLLAR LOW
The prospects of lower interest rates, and hence lower returns on some asset, dragged the dollar fell to fresh record lows against the euro and a basket of currencies.
The euro rose as high as $1.4377, the highest since its 1999 launch, according to Reuters data.
The dollar index -- which tracks its progress against six major currencies -- fell to 77.056, the lowest since its post-Bretton Woods inception over 30 years ago.
Partly as a result, gold hit $778.25, the highest level since January 1980.
Euro zone government bonds were generally lower.
The December Bund future was down 3 ticks on the day at 113.93. The two-year Schatz yield was up 1.7 basis points at 3.950 percent while the 10-year Bund yield was flat at 4.165 percent.
(Additional reporting by Toni Vorobyova)