* 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 (Reuters) - 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 economic outlook.
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 off.
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” than expected.
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 higher-rewarding alternatives.
“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 Kiev.
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.