World stocks kicked off the new year hitting a 15-month high on optimism the global economic recovery is underway, while the US dollar slid on profit taking ahead of a US jobs report this week.

The weak dollar pushed energy and commodity prices higher while safe-haven US Treasury yields eased from near seven-month highs.

The MSCI's all-country world stock index was up 1.54 per cent, a level not seen since October 2008 just after US investment bank Lehman Brothers collapsed to trigger financial turmoil.

Investors got an early boost with US manufacturing sector data showing growth for a fifth straight month in December, its best showing since early 2006, adding to hopes of a more robust US recovery in 2010.

"This is what we need in 2010 for a V-shaped recovery," said Alan Lancz, President at Alan B. Lancz & Associates Inc, in Toledo, Ohio.

"Looks like we're off to a fresh start for the year and the economy continues to roll along. I think this could be part of a trend with stimulus and a more positive outlook. Until we see interest rates moving up, we're pretty positive that the numbers will continue to move up.”

The Dow Jones industrial average was up 1.54 per cent, at 10,588.42. The Standard & Poor's 500 Index was up 1.61 per cent, at 1,133.07 and the Nasdaq Composite Index was up 1.78 per cent, at 2,309.43.

The US dollar slid as investors hesitated to push it higher against its peers ahead of Friday's US non-farm payrolls report. Payrolls have been in uninterrupted decline since January 2008.

Market players will want to see an improvement to the high unemployment that has battered consumer confidence and spending in the United States. Consumer spending is the backbone of the US economy, accounting for two-thirds of its activity.

Most economists think economic growth strengthened in the fourth quarter, which means companies that cut to the bone to survive the deep recession will need to start bringing back workers to meet renewed demand.

"Investors are squaring positions ahead of some key numbers." said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.

"Obviously, the jobs number will headline this week's data but we do have some numbers that will either confirm that a US recovery is gaining traction or could dampen some of the recent enthusiasm that the dollar enjoyed."

The single European currency recovered to trade at $1.4416 after earlier falls, which took it as low as $1.4258 and testing December's low around $1.4218.

A euro zone purchasing managers' survey, which confirmed the region's manufacturing sector expanded at its fastest rate in 21 months in December, also helped the euro against the dollar.

The dollar was down against a basket of trading-partner currencies, with the dollar index down 0.55 per cent at 77.435. Against the Japanese yen, the dollar was down 0.56 per cent at 92.48.

The drop in the dollar and colder than normal temperatures in the US spurred a buying opportunity for crude oil, driving prices up 2.4 per cent or $1.97 to $81.33 a barrel.

Gold rose 2.5 per cent, hitting a three-week high of $1,123.4 an ounce, and lifting other precious metals, with palladium climbing to its highest since July 2008, and platinum hitting a 16-month peak.

Coming off its worst year in a decade and worst month in more than five years, US Treasury debt prices rose, with benchmark 10-year US Treasury notes up 1/32, yielding 3.833 per cent versus 3.84 per cent on Thursday, before the New Year holiday.

Meanwhile, The FTSEurofirst 300 index of top European shares rose to a 15-month closing high helped by upbeat economic data and with banks among the major gainers.

The index rose 26 per cent in 2009 -- its best yearly gain in a decade and following a dismal 2008 when it slipped 45 per cent. It has surged 63 per cent since hitting a record low in March 2009.

Japan's Nikkei average also hit a 15-month closing high on its first trading day of the year, while the Tokyo Stock Exchange had a smooth launch for its $145 million "Arrowhead" trading system, as Asia's biggest bourse targets a dramatic increase in speed to revive its business and reputation. – Reuters