Investors jumped into equities on Monday, sending world stocks close to their highest level for the year, while the dollar weakened across the board as demand for riskier assets took hold.
A weekend agreement by the G20 to keep economic stimuli running helped drive risk appetite. The meeting bolstered the view that interest rates will remain low, sending two-year euro zone government bond yields to historic lows.
The MSCI's all-country world stock index <.MIWD00000PUS>, a benchmark for professional investors, rebounded 1 percent after a rare week of losses, and is only a few points off a year high reached in late August.
The pan-European FTSEurofirst 300 index <.FTEU3> added 1.4 percent, reversing losses from the previous week, on expectations of mergers and acquisitions after Kraft
Japan's Nikkei <.N225> closed 1.3 percent higher while emerging market equities <.MSCIEF> were up about the same. Wall Street was closed for the Labor day holiday.
The current equity rally has further to go, Morgan Stanley said in a note. A growth cycle is starting, we intend to buy on weakness.
The Group of 20 finance ministers and central bankers said over the weekend they would not remove economic stimulus until the global recovery was well entrenched.
Notwithstanding Monday's gains, equity markets have been pulling back somewhat from the sharp rally that began in March. The world index lost nearly 1.5 percent last week, the first decline in eight week and only the fifth since the rally began.
Some degree of risk aversion -- and a weaker dollar -- was evident on the gold market.
Spot gold gained 4 percent last week and is currently trading around $995 an ounce.
Two-year euro zone government bond yields slipped to historic lows on the view that interest rates will stay low for longer than some had expected following comments from the weekend's G20 meeting
The two-year Schatz yield slipped to a euro lifetime low of 1.064 percent, while the 10-year yield was at 3.228 percent.
The dollar and yen were generally weaker with the former down 0.2 percent against a basket of major currencies <.DXY>.
The Australian dollar hit its strongest level against the dollar in a year as shares gained after a G20 pledge to keep economic stimulus packages in place.
The G20 was positive for risk appetite, you can see that from the yen and dollar's performance. At the same time people are still a bit cautious as we are approaching the end of this policy cycle, said Geoffrey Yu, a currency strategist at UBS.
Against the yen, the dollar was flat to slightly stronger at 93.00 yen.
The euro gained 0.3 percent to $1.4336, near a one week high but still below August's eight-month high at $1.4448.
(Additional reporting by Emelia Sithole-Matarise and Jeremy Gaunt)
(Editing by Andy Bruce)