By Marc Jones
LONDON (Reuters) - The dollar was slumped near a two-year low against the euro on Friday as clear expectations of continued U.S. bond purchase left it facing its sixth weekly fall in seven and world shares close to five-year highs.
Soft U.S. jobs data this week has bolstered the view that the Federal Reserve will not tamper with its huge bond-buying program until well into next year, triggering a drop in the dollar and lifting both shares and bonds.
The broad weakness of the dollar remained the dominant theme for markets and a dip in Germany's Ifo business index and euro zone lending data failed to dull the euro as it hovered at $1.3820 after hitting $1.3833 overnight.
"I think it is fairly clear the euro-dollar is pretty well bid but we did have the weaker PMI data yesterday too and it serves as a reminder that the ECB is likely to remain dovish," said Jane Foley, FX strategist for Rabobank in London.
"The softer data as well as the possibility for headlines from the ECB's AQR (Asset Quality Review of banks) could see people really question whether euro has the momentum to hit $1.40," she added.
Given worries about tighter cash markets in China and the impact of the strong euro on company earnings, European shares were already subdued before the data, and an acceleration in British third quarter GDP did little to change the picture.
The region's broad FTSEurofirst 300 index (.FTEU3) was down 0.3 percent by 0440 ET. That left a third straight weekly rise in the balance, though shares remained near five-year highs.
Sterling has also enjoyed a strong run against the dollar in recent months and it edged up after the UK GDP reading with buyers encouraged by its economic recovery.
In Asia, the Indonesian rupiah rallied nearly 2 percent against the weak dollar, but the Aussie was on the back foot. Australian shares (.AXJO) rose 0.3 percent, ending near the 5-year high of 5,402.4 hit earlier in the week.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> eased 0.35 percent, reversing earlier slight gains as rising Chinese money market rates continued to overshadow signs of a pick-up in manufacturing.
Shanghai shares (.SSEC) hit their lowest levels in a month, while Tokyo's stock market suffered its first weekly drop in three.
South Korean stock markets (KSC:^) also fell as investors looked to take profits following record foreign buying for 40 consecutive sessions that has pushed the won to a two-year high this week.
U.S. S&P E-mini futures pointed to a softer start on Wall Street later. The S&P 500 index (.SPX) had advanced 0.3 percent Thursday on solid earnings and expectations that monetary stimulus will be in place for the foreseeable future.
Downbeat data has supported that view. U.S. manufacturing output fell for the first time in four years while the number of new claims for unemployment benefits fell less than expected last week.
"The dollar will not rally without Fed tapering expectations rising again, but we would not chase EUR/USD higher here, as rate compression suggests the pair is unlikely to break much higher," Societe Generale analysts wrote in a note.
"Fed tapering expectations being pushed out into 2014 and further ECB easing early next year suggest a favorable policy environment for the FX carry trade."
Yet the Aussie and New Zealand dollars were nursing broad losses as investors quit extended long positions in those currencies too.
The Aussie was near a session low at $0.9586. It had hit a 4-1/2-month peak of $0.9758 on Wednesday, but is on track for a loss of close to 1 percent for the week.
Against the yen, the dollar stood at 97.04, a shade off the two-week low of 97.15 yen hit on Wednesday. The dollar index (.DXY), which tracks a basket of major currencies, was at 79.090, just off an 8-1/2 month low.
After a choppy week for commodities, gold paused after climbing 1.1 percent on Thursday, while U.S. crude prices held above their recent 3-1/2 month low at $97 and copper slid towards its third weekly drop in four.
"The longer China prolongs the recent tightening, the more it's going to squeeze out liquidity and raise the risk of a more significant pull-back in demand in general," said Thomas Lam, chief economist at DMG & Partners Securities in Singapore with regard to copper.
(Additional Reporting by Melanie Burton in Singapore; Editing by John Stonestreet)