European shares, dollar weaken as U.S. data eyed

LONDON (Reuters) - European shares retreated from 4-1/2 year highs and gold rose on Friday as investor enthusiasm for riskier assets, which had been supported by signs of growth in the U.S. economy, began to wane.

Wall Street also looked set for a mixed start as traders wait for fresh insight on the economy's performance with the benchmark S&P 500 index <.SPX> sitting within a few points of its all time high. <.N>

"I think there is a feeling that the risk appetite is gone too far and I wouldn't be surprised to see equities pulling back and gold coming back into favor a bit in coming days," Standard Chartered analyst Dan Smith said.

Gold inched up 0.2 percent to $1,592.60 an ounce, on its way to a weekly gain of nearly one percent.

The dollar took a breather from its recent sprint higher as well, slipping back 0.4 percent against a basket of major currencies <.DXY> and moving away from the seven-month high touched on Thursday.

While the euro rose 0.4 percent to $1.3062, recovering from Thursday's three-month low of $1.2911, to be on course for a second consecutive weekly gain against the dollar.

OPTIMISM RULES

Investors had been buying riskier assets this month as data on U.S. jobs, retail sales and factory output have pointed to the recovery in the world's largest economy gaining momentum, despite tax rises and government spending cuts.

A lack of signs of inflation in the numbers has also eased fears the Federal Reserve would need to consider an early exit from its aggressive quantitative easing (QE) policy that has helped support asset prices around the world.

The encouraging outlook has seen the Dow Jones Industrial index <.DJI> set record highs over the past 10 days to post its best winning streak since late 1996.

Europe's broad FTSEurofirst 300 index <.FTEU3> fell 0.4 percent on Friday but is still on course for its fifth weekly rise and hovering near its best levels since mid-2008. <.EU>

London's FTSE 100 <.FTSE>, Paris's CAC-40 <.FCHI> and Frankfurt's DAX <.GDAXI> were up to 0.7 percent lower. <.L>

MSCI's all-world index <.MIWD00000PUS>, which tracks 9,000 stocks in 45 countries, was set for a second consecutive weekly rise for a gain of 6.75 percent this year so far.

DEBT STABILITY

Europe's crisis-sensitive bond markets were largely steady despite the increasing fears that Italy's political stalemate may mean new elections in October which could result in an anti-austerity party or coalition taking charge.

Italian bond yields did ease as the country's parliament convened for the first time since last month's vote, with parties still deadlocked over forming a government.

"If there is no capable government any time soon ... (Italian bonds) should come under pressure again," said Viola Julien, a fixed income analyst at Helaba Landesbank Hessen-Thueringen.

Italian 10-year yields were 5 basis points lower on the day at 4.59 percent.

Bond investors were showing little reaction to developments at a summit of 27 European Union leaders in Brussels, which signaled support for slightly more growth-friendly spending policies after French President Francois Hollande challenged German-driven fiscal austerity.

U.S. Treasury bonds, like the dollar, were little changed as investors waited for consumer prices data at 08:30 a.m. EDT, industrial output number at 1315 GMT and a consumer sentiment reading at 1355 GMT.

The 10-year Treasury note yield was steady at 2.03 percent.

JAPAN SURGE

Meanwhile the yen and Japanese stocks rose following approval by the Japanese parliament of Haruhiko Kuroda as the next governor of the Bank of Japan. Markets expect the BOJ under Kuroda to take more aggressive easing measures, maybe as soon as its next policy meeting on April 3-4.

Japan's Nikkei stock average <.N225> rose 1.3 percent to a new 4-1/2-year peak on the appointment, while the MSCI's index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> also rose 0.4 percent.

Elsewhere the British pound was gaining on the dollar following comments by outgoing Bank of England Governor Mervyn King, who said the bank was not seeking a further depreciation in sterling as the currency was now properly valued.

The pound gained 0.5 percent to $1.5151, well clear of a 33-month trough of $1.4832 set earlier in the week.

Oil markets were also drawing strength from the better U.S. economic outlook with concerns over supply from the Middle East added support.

U.S. crude oil gained 50 cents to $93.53 a barrel while Brent rose $1.07 a barrel to $109.30.

Supply worries resurfaced when President Barack Obama, ahead of a visit to Israel next week, said military force remained an option if sanctions and diplomacy failed to thwart Iran's nuclear ambitions.

(Additional reporting by Clara Denina, Marc Jones and Marius Zaharia; Editing by Peter Graff and Giles Elgood)