LONDON The dollar hit 6-week lows on Monday as recent weak U.S. data cast doubt on the pace of monetary tightening, while prospects for a new reforming government in Italy and better euro zone growth boosted the bloc's periphery.
World stocks .MIWD00000PUS rose to 3-1/2 week highs, helped by encouraging news on Chinese lending, but volumes were thin due to a U.S. market holiday.
A run of weak U.S. data, including an unexpected fall in January manufacturing output on Friday, has caused some investors to revise their expectations of how fast the Federal Reserve will scale back stimulus and tighten monetary policy.
"There's been a very patchy data outlook for the past six weeks to two months and expectations of a rate rise from the Fed have been curtailed," said Peter Kinsella, strategist with Commerzbank in London.
Higher-yielding emerging markets .MSCIEF, which have suffered as U.S. investors bring their money home in anticipation of tapering, also rose to 3-1/2 week highs.
Data at the weekend showed Chinese banks disbursed the highest volume of loans in any month in four years in January, a surge that suggests the world's second-biggest economy may not be cooling as much as some fear.
The dollar hit a six-week low .DXY against a basket of currencies and three-week lows against the euro following recent upbeat euro zone economic readings. It edged off those lows by 1500 GMT, to 80.149 and $1.3704 per euro.
It rose against the yen after data showed Japan's economy grew just 0.3 percent in the fourth quarter, confounding forecasts of a 0.7 percent gain.
In Europe, the mood was upbeat after Italian President Giorgio Napolitano asked center-left leader Matteo Renzi to form a new government after former Prime Minister Enrico Letta resigned last week.
Renzi has promised a radical program of action to lift Italy out of its most serious economic slump since World War Two, but will have to deal with the same unwieldy coalition which failed to pass major reforms under its previous leader.
Ratings agency Moody's lifted Italy's ratings outlook to stable from negative late on Friday, reinforcing optimism that a new government will be able to push through the reforms.
"Investors are quite sanguine about the economic and political situation in peripheral Europe, and that's a very positive signal," said David Thebault, head of quantitative sales trading at Global Equities. "Ten-year bond yields continue to fall across the board, a sign of stability which has prompted a lot of investors to come back."
The yield on Italy's benchmark 10-year government bond hit an eight-year low of 3.622 percent, and Spanish yields were also trading at eight-year lows.
Euro zone finance ministers meet in Brussels on Monday.
European stocks .FTEU3 also reached 3-1/2 week highs, and Italy's FTSE MIB .FTMIB equity index, which outperformed with a 1.6 percent gain on Friday, gained 0.3 percent.
Safe-haven Bund futures fell 4 ticks.
The lower dollar spurred gold to a fresh three-month peak at $1,329.55 before it trimmed gains to $1,327.50.
In energy markets, Brent oil futures dipped 1 cent to $109.05 a barrel, while U.S. crude firmed 48 cents to $100.78.
Supply disruptions and a severe winter across North America that has boosted heating demand were also supporting oil.
(Additional reporting by Wayne Cole in Sydney, Blaise Robinson in Paris and Laurence Fletcher in London; Editing by Toby Chopra)