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Dollar gains, equity rally stalls as caution returns

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By Herbert Lash

NEW YORK (Reuters) - World stock markets stalled at two-week highs and oil prices fell on Thursday as increased restrictions in parts of the world to contain the spread of the Omicron COVID-19 variant tempered investor optimism about the economic recovery.

European shares closed lower after opening higher, while stocks on Wall Street were mostly in the red and Japan's blue-chip Nikkei stock index slipped almost half a percent.

That left MSCI's world stock index hovering near two-week highs but struggling to make much headway after three days of solid gains. It has risen more than 3% this week and is set for its biggest weekly rise since early February.

U.S. Treasury yields retreated following three straight days of gains for the benchmark 10-year note after data again showed a tight U.S. labor market ahead of a key inflation reading on Friday that could influence Federal Reserve policy-making.

Even if the year-over-year consumer price index gain comes in less than the expected 6.8%, the Fed will not back off plans to quicken the tapering of its bond-buying program, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

"The Fed has made its pivot," he said. "The labor market is strong enough and has enough momentum to take care of itself and now it's got to turn our attention back to inflation."

The number of Americans filing new claims for unemployment benefits dropped to the lowest level in more than 52 years last week as labor market conditions tightened further amid an acute shortage of workers, the Labor Department said.

The yield on 10-year Treasury note fell below 1.5%, down 1.8 basis points to 1.491%.

The dollar edged higher against a basket of currencies as a warning from the International Monetary Fund's chief economist added to concerns about Omicron and tempered the appetite for currencies and other assets considered "risky."

The pandemic could turn out far more costly than estimated, but central banks do not have the space to keep monetary policy loose and interest rates low as inflationary pressures build, the IMF's Gita Gopinath said in Geneva.

Deputy Governor Toni Gravelle of the Bank of Canada said there is a risk Omicron could hold back services consumption and exacerbate supply constraint issues.

Britain announced tougher COVID-19 restrictions on Wednesday.

The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.27% to 96.214. The euro fell 0.42% to $1.1294 and the yen slid 0.21% to $113.42.

On Wall Street, the Dow Industrials tried rebound for much of the session but closed essentially flat. The S&P 500 fell 0.72% and the Nasdaq Composite lost 1.71%.

Healthcare and consumer staples were the only two of the 11 S&P sectors to gain.

MSCI's all-country world index closed down 0.60% and the broad STOXX Europe 600 index fell 0.08%, but emerging markets stocks rose 0.54%.

Oil prices fell after measures by some governments to slow the spread of Omicron, while a ratings downgrade for two Chineseproperty developers stoked fears over the economic health of the world's biggest oil importer.

Developers China Evergrande and Kaisa were downgraded to "restricted default" by rating agency Fitch due to non-payment of offshore bonds. A source said Kaisa had started work on restructuring its $12 billion offshore debt.

Hopes for monetary easing in China after a cut to banks' reserves ratio this week and fairly benign inflation figures on Thursday lifted Chinese shares and Asian shares outside Japan, which rose 0.6% to a two-week peak.

China's blue chip CSI300 index rose 1.7% and has gained 3.6% for the week so far. [.SS]

Brent crude futures settled down $1.40 at $74.42 a barrel, while U.S. crude also fell $1.42 to settle at $70.94 a barrel.

Gold slipped as the dollar firmed. U.S. gold futures settled down 0.5% at $1,776.70 an ounce.

Bitcoin fell 5.70% to $47,645.13.

(Reporting by Herbert Lash; Additional reporting by Dhara Ranasinghe in London and Tom Westbrook in Sydney; Editing by Dan Grebler, Cynthia Osterman and Lisa Shumaker)

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