U.S. downturn worries ease among investors

A man walks past a stock quotation board outside a brokerage in Tokyo September 19, 2007. Asian stocks outside of Japan hit a lifetime high on Monday, but the dollar headed lower after a solid U.S. jobs report failed to dent expectations for another cut in U.S. interest rates.

LONDON (Reuters) - Worries about a U.S. economic downturn and its fallout across the world eased on Monday, lifting the dollar and Asian stocks although European shares took a breather after a five-session rally.

Wall Street also looked set for a weak start in light Columbus Day trade, but only after surging to all-time highs on Friday after stronger than expected U.S. jobs data that calmed fears about a slowdown in the world's largest economy.

"The payrolls numbers have reduced fears that the U.S. economy is heading into recession," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frankfurt.

Data showed the U.S. economy added 110,000 new jobs in September and hiring in each of the two previous months was revised up significantly, showing a more resilient labor market than previously thought.

This eased one of the two big concerns of investors at the moment -- that the U.S. economy could slide and pull down growth elsewhere. The second concern -- widespread problems stemming from a credit squeeze -- currently appears contained.

Investors are likely to be looking this week at U.S. data that should give some hint about how U.S. consumers have been reacting to the credit problems. Retails sales and consumer confidence reports are due on Friday.

In the meantime, European stocks were flat to lower. Early gains were wiped out when German software group SAP's (SAPG.DE) deal to buy French rival Business Objects BOBJ.PA triggered cost and profit concerns.

It left the FTSEurofirst 300 .FTEU3 index of top European shares down 0.3 percent.

Asian stocks outside of Japan, however, hit record highs again in keeping with the flood of money moving into emerging markets since the U.S. Federal Reserve cut interest rates last month.

Japan's markets were closed for a holiday.

DOLLAR, BONDS

The dollar gained against major currencies as the jobs report eased growth worries and lowered expectations for interest rate cuts.

The futures market reflected a 54 percent chance the Fed would cut rates when it meets on October 31, lower than the 75 percent priced in as recently as last Thursday and the 85 percent nearly a week ago.

The dollar index against major currencies firmed to 78.576, up 0.3 percent on the day and moving further away from record lows of 77.660 set earlier this month .DXY. The euro was down 0.3 percent at $1.4091.

Signs that European officials are growing increasingly worried about the euro's elevated levels also kept the single European currency from making further gains.

Euro zone government bond prices were flat to lower with traders expecting little action because U.S. bond markets were closed to the holiday.

The interest rate-sensitive two-year Schatz yield was up 1.7 basis points at 4.052 percent.

The 10-year Bund yield was flat at 4.351 percent.

(Additional reporting by Toni Vorobyova)