NEW YORK (Reuters) - The euro hit an 11-month high and global equity markets advanced on Friday on signs of a healthier European financial system and a brighter outlook for Germany, while U.S. stocks extended a rally to an eighth day, their best run since late 2004.
Solid U.S. corporate earnings and the strongest seasonal inflows to U.S. stock mutual funds in a decade also helped lift Wall Street, with the benchmark S&P 500 index closing above the 1,500 mark for a the first time in more than five years ago.
The Dow closed at its highest level since October 2007.
News from Europe was also bullish. The European Central Bank said banks will repay 137 billion euros from crisis loans next week, returning more cash earlier than expected in a sign parts of the financial system are regaining their health.
The repayments show financial strains are receding and "allowing investor risk appetite to rise," said David Joy, chief market strategist at Ameriprise Financial in Boston.
"So you're starting to see more interest in stocks than in bonds, less interest in safe-haven currencies and just a general rise in risk appetite," he said.
By taking back the three-year loans after only one year, the ECB has become the first major central bank to start moving away from unconventional monetary policy measures to tackle the crisis. In contrast, the U.S. Federal Reserve and Bank of Japan are buying bonds to stimulate economic growth.
The scale of the repayment, which beat the average estimate of around 100 billion euros in a Reuters poll, sent the euro higher, pushed German government bond prices down and boosted bank stocks across the euro zone.
"This is more than we had expected and underlines the material improvement in funding conditions for most European banks in the past 12 months," said Michael Symonds, a credit analyst at Daiwa Capital Markets.
Global shares as measured by MSCI's all-country world equity index rose 0.51 percent to 354.98.
The Dow Jones industrial average closed up 70.65 points, or 0.51 percent, at 13,895.98. The Standard & Poor's 500 Index rose 8.14 points, or 0.54 percent, at 1,502.96. The Nasdaq Composite Index gained 19.33 points, or 0.62 percent, at 3,149.71.
For the week, the Dow rose 1.8 percent, the S&P climbed 1.1 percent and the Nasdaq rose 0.5 percent. It was the fourth straight week of gains for all three indexes.
Among companies beating analysts' expectations, Procter & Gamble Co's quarterly profit blew past expectations and
Honeywell International Inc posted earnings just above Wall Street's estimates. P&G rose 4.02 percent to $73.25 but Honeywell barely edged higher, up 0.13 percent at $68.33.
Of companies in the S&P 500 that have reported earnings to date for the fourth quarter of last year, 68 percent have beaten analysts' expectations, slightly higher than the 65 percent average over the previous four quarters.
European shares scaled multi-month peaks on the bigger-than-expected loans paybacks and after the closely watched Ifo business morale index beat consensus estimates for January to match the most optimistic economists' forecasts.
Frankfurt's DAX index led the rally, scaling five-year highs and closing 1.4 percent higher.
The FTSEurofirst 300 index of pan-European shares closed 0.32 percent higher at 1,174.81.
German bond futures settled down 70 ticks at 142.50.
"People are choosing to pounce on any bit of good news. For the moment the trend is very much to the upside," said Stephen Walker, head of equities research and market strategy at Ashcourt Rowan.
The euro hit $1.3479, its highest since last February, to extend gains following the release of data showing the German economy gathering speed again after contracting late last year. The euro last traded up 0.60 percent at $1.3455.
Data showing new U.S. single-family home sales fell in December was not a cause for concern on Wall Street as the median sales price rose and the sector still appears to be a bright spot in the U.S. economy's recovery.
Manufacturing in China and the United States also grew this month at the quickest pace in about two years.
Oil traders sold crude to book profits after the strong economic data increased optimism about the state of the world economy and underpinned gains made during the week.
Brent crude oil futures settled unchanged at $113.28, after spending most of the day higher.
U.S. crude settled down 7 cents at $95.88.
U.S. Treasury debt yields rose, with 30-year bonds trading a point lower in price after better-than-expected euro zone data spurred selling of safe-haven U.S. government debt.
The benchmark 10-year U.S. Treasury note was down 26/32 in price to yield 1.9434 percent.
Despite the recent hike in bond yields, strategists said a 2 percent yield on 10-year U.S. Treasuries was not an immediate prospect.
"The bigger-than-expected loan repayments to the ECB are not enough to add another six basis points to the 10-year yield," said Kevin Giddis, head of fixed income at Raymond James Morgan Keegan.
Additional reporting by Ellen Freilich; editing by Chizu Nomiyama, Nick Zieminski, Dan Grebler