European and US stocks advanced Friday and the dollar fell as investors digested key American jobs data that dampened expectations of more aggressive Federal Reserve interest rate hikes.

After firm gains in Europe, major indices in New York shook off early weakness and finished firmly higher, with the Dow piling on more than two percent.

The much-anticipated monthly government jobs report was solid, with the United States economy adding a better-than-expected 223,000 jobs in December as unemployment dipped to 3.5 percent.

But analysts pointed to a tempering of wage growth, which was up 4.6 percent on a 12-month basis through December, compared with a 4.8 percent reading for the prior month.

That was followed by a surprisingly poor services sector report from the Institute for Supply Management.

The report showed the first contraction since spring of 2020, with the business activity index and new orders index both plunging.

"We're still in a 'bad news is good news' type of market reaction," said Nick Reece, a vice president at Merk Investments. "I'm not sure if that dynamic is going to last forever."

"I feel like at some point, we're going to get into 'a bad news is bad news' dynamic with respect to a potential recession being bad for the stock market," he said.

Global equities have enjoyed a largely upbeat start to the new year after a dismal 2022 marked by concerns over the war in Ukraine and central bank rate hikes aimed at taming soaring prices.

The dollar fell Friday versus the euro and other currencies over what dealers said were dimming expectations of more aggressive rate hikes from the Fed.

"A combination of slightly slower US wages growth, and a disappointing ISM services report for December has seen the US dollar slide back sharply, pulling the pound off its lowest levels since November... as traders pare back bets that the Fed might hike by (50 basis points) in February," CMC Markets analyst Michael Hewson told AFP.

Optimism

Bourses in London, Paris and Frankfurt all climbed about one percent or more.

Official data Friday showed that annual inflation in the eurozone dropped for a second month in a row, to 9.2 percent in December.

It was the first decline into single digits since September and while inflation shows signs of cooling around the world, it remains at sky-high levels.

In Asia, Hong Kong's stock market dipped after three days of gains, while Singapore, Mumbai, Wellington and Manila were also in the red.

Shanghai edged up, with help from reports saying China was considering relaxing strict rules on borrowing for property developers.

Tokyo, Sydney, Seoul, Taipei, Bangkok and Jakarta also rose.

There is a general sense of optimism in Asia as China emerges from almost three years of zero-Covid lockdowns and other strict containment measures.

Key figures around 2055 GMT

New York - Dow: UP 2.1 percent at 33,630.61 (close)

New York - S&P 500: UP 2.3 percent at 3,895.08 (close)

New York - Nasdaq: UP 2.6 percent at 10,569.29 (close)

London - FTSE 100: UP 0.9 percent at 7,699.49  (close)

Frankfurt - DAX: UP 1.2  percent at 14,610.02 (close)

Paris - CAC 40: UP 1.5 percent at 6,860.95 (close)

EURO STOXX 50: UP 1.5 percent at 4,017.83 (close)

Tokyo - Nikkei 225: UP 0.6 percent at 25,973.85 (close)

Hong Kong - Hang Seng Index: DOWN 0.3 percent at 20,991.64 (close)

Shanghai - Composite: UP 0.1 percent at 3,157.64 (close)

Euro/dollar: UP at $1.0647 from $1.0522 on Thursday

Pound/dollar: UP at $1.2095 from $1.1908

Euro/pound: DOWN at 88.01 pence from 88.36 pence

Dollar/yen: DOWN at 132.13 yen from 133.41 yen

West Texas Intermediate: UP 0.1 percent at $73.77 a barrel

Brent North Sea crude: DOWN 0.2 percent at $78.57 a barrel