NEW YORK Global shares rose on Monday, supported by signs of tentative progress on negotiations over the U.S. "fiscal cliff," while a win by Japan's conservative Liberal Democratic Party lifted the dollar to a 20-month high against the yen.
The biggest moves of the day came in the currency market following a landslide election victory for Japan's LDP on Sunday, which opened the way for a shift in economic strategy in an effort to lift the world's third-largest economy out of recession.
The triumph was seen as piling pressure on the Bank of Japan to ease further at its next policy meeting, which ends on Thursday, setting the stage for an even bigger fall in the yen. Looser monetary policy and more spending would be expected to weaken the currency, which would help make exports more profitable.
In the United States, Republican House Speaker John Boehner signaled willingness to move closer to President Barack Obama's demands as they try to avoid the automatic tax hikes and spending cuts that would take place in the new year if no deal were reached.
"I think there's a lot of expectation that a fiscal cliff deal of some sort does get done," said Joseph Benanti, managing director of Rosenblatt Securities in New York. "People are going to stay slightly positive, not overly enthusiastic, going into the end of the year."
Uncertainty over if and when a federal budget deal will be done has kept investors cautious in what is already a normally quiet trading period heading into year-end.
Investors are worried the economy could slide back into recession if the full brunt of the tax and spending changes is allowed, though most expect a deal will eventually be reached.
In U.S. stock trading, nine of the S&P 500's 10 sectors were higher, led by financials, as the S&P Financial Index gained 1.5 percent. Shares of Bank of America rose 2.8 percent to $10.87 and Citigroup gained 3.2 percent to $38.81.
The Dow Jones industrial average was up 76.53 points, or 0.58 percent, at 13,211.54. The Standard & Poor's 500 Index was up 13.13 points, or 0.72 percent, at 1,423.78. The Nasdaq Composite Index was up 30.00 points, or 1.01 percent, at 3,001.33.
The MSCI world equity index rose 0.4 percent to 337.61 following a 0.5 percent decline in Asia share markets outside Japan. The FTSE Eurofirst 300 index was down 0.1 percent.
The major debt markets, however, did take some encouragement from the Boehner proposal on taxes, with the benchmark 10-year U.S. Treasury note was down 13/32, with the yield at 1.7491 percent.
If the S&P 500 sustains its gains through the session, the index would snap a two-session losing streak. Despite the uncertainty of "fiscal cliff" talks, the S&P has performed well in the last month, grinding higher on mostly light volume.
The yen dropped to a 20-month low against the U.S. dollar. Japan's former Prime Minister Shinzo Abe returns to power with the LDP's victory. He campaigned on a platform to boost the moribund economy with hyper-easy monetary policy and big fiscal spending to beat deflation, a recipe for weakening the yen that gives Tokyo an export advantage in international markets.
"The fact that the LDP secured a two-thirds majority gives them a strong mandate and will lead to significant policy changes," said Ian Stannard, head of European currency strategy at Morgan Stanley.
"The yen weakening trend will be sustainable and dollar/yen will move higher while euro/yen also has the potential to move sharply higher." He said Morgan Stanley forecasts the dollar to rise to 90-92 yen by the end of 2013, while the euro could rise to 113 yen by the end of this year.
The euro rose against the yen as well, but its gains on the U.S. dollar were undermined by European Central Bank President Mario Draghi, who reiterated concerns over slow growth of Europe's economy.
In New York trade, the greenback was up 0.31 percent to 83.70 against the yen, its best level since April 2011. The euro climbed 0.36 percent to 110.29 yen but fell back from its 8-1/2-month high of $1.3191 to trade at $1.3169, up just 0.06 percent against the U.S. currency.
Brent crude prices dipped on Monday while U.S. oil futures rose as news of a key U.S. pipeline expansion and optimism about a deal to avoid the fiscal cliff prompted spread trading between the two contracts.
Brent crude futures fell 32 cents to $107.86 a barrel, having swung from $107.72 to $108.50. The front-month U.S. January crude rose 62 cent to $87.35 a barrel, with prices finding some resistance after briefly topping the 50-day moving average at $87.66 a barrel.
(Reporting by Angela Moon; Additional reporting by Gabriel Debenedetti and Daniel Bases; Editing by Dan Grebler and James Dalgleish)