* Sterling hits highest in year vs euro after UK data
* Chinese index rises 2.3 pct to 2-week high
* Dollar index near 2-month high on Fed taper prospects
* Australia inflation data hurts shares, lifts Aussie
* European shares, periphery bonds extend gains
By Marc Jones
LONDON, Jan 22 World stocks edged back towards
5-1/2 year highs on Wednesday as moves to cool lending-market
tensions in China gave an extra boost to the brightening global
An upgrade of the International Monetary Fund's world
forecasts on Tuesday has lifted sentiment in equity markets and
some encouraging company earnings meant European shares were
quickly in their stride again as the rally in southern euro zone
government bonds also resumed.
With the U.S. Federal Reserve expected to make a second
small cut to its huge stimulus programme next week, the dollar
remained broadly supported near a two-month high against
a basket of currencies.
Grabbing the spotlight was the UK, as another
sharper-than-expected fall in unemployment, to 7.1 percent,
provided fresh proof of a strengthening economy and bolstered
speculation that a Bank of England rate rise may not be too far
Minutes from the Bank of England's last meeting, released at
the same time as the data, showed policymakers now acknowledged
unemployment was likely to fall to the 7 percent threshold they
have set for reviewing the bank's policy, "materially earlier"
The news sent sterling surging to its highest in a year
against the euro, up against the dollar while
UK government bonds, or gilts, lost out as investors sought out
"It will certainly be the big challenge for Bank of England
governor Mark Carney and the MPC (Monetary Policy Committee) in
managing the forward guidance," said Michael Hewson, chief
strategist at CMC Markets.
"What does he do when it does hit 7 percent? ... I think the
only way is up for the pound."
In Asian trading, Chinese shares jumped 2.6 percent as this
week's moves by the country's central bank to cool rising
bank-to-bank borrowing costs continued to buoy their recovery
from a six-month low.
An upside inflation surprise also lifted the Aussie dollar
as rate cut prospects faded, while the Canadian dollar
sagged near a four-year low on bets the Bank of Canada
could shift towards an easier policy stance later.
Emerging markets were also in focus again as political
unrest flared back up in both Thailand and Ukraine.
Ukraine's hryvnia currency hit its lowest level against the
dollar since October 2009 and the country's debt insurance costs
spiked after two demonstrators were shot as a new wave of
anti-government protests spread in the capital
In Thailand, the shooting of a pro-government activist hit
that country's stock market and initially the baht
, although the currency recovered after the central bank
resisted the temptation to cut rates.
"Thai financial markets are relatively calm for now. But if
the political standoff drags on, then there will be delays in
infrastructure investment and larger economic implications,"
said Yukino Yamada, senior strategist at Daiwa Securities.
Markets in Turkey, meanwhile, steadied after what had been
another day of drama on Tuesday. The lira was breathing
easier having plunged to a new record low, while stocks
were up 1.5 percent and on track for a third day of gains.
Among commodities, oil prices rose on expectations that
accelerating growth in industrialised economies would lift
demand, with U.S. crude futures rising 0.6 percent to
$95.61 a barrel, its highest since Jan. 3.
However, copper dropped and iron ore fell to its weakest
level in more than six months as slow demand from top importer
China hit sentiment.