Stocks and oil rally as dollar drops

Stock markets and oil prices rallied Friday, with investors largely pricing in more central bank interest rate hikes aimed at taming surging inflation.

The dollar slid as much as one per cent against the pound and euro after recent hefty gains.

London's stock market jumped 1.2 per cent, mirroring advances in Paris and Frankfurt, while the British capital's exchange mourned the death of Queen Elizabeth II.

We are deeply saddened at the passing of Her Majesty Queen Elizabeth II, the London Stock Exchange said in a message posted on its website following her death on Thursday.

Markets are being very British about the whole thing, carrying on in a fashion that I suspect she would have approved of, said IG analyst Chris Beauchamp.

Wall Street followed the upbeat European session with a third straight positive day.

The S&P 500 finished at 4,067.36, up 1.5 per cent for the day and 3.6 per cent for the week, snapping a three-week losing stream.

The more confident mood across equity and oil markets was reflected in a cooler dollar, which had surged to multi-decade highs against major peers in recent weeks owing to the US Federal Reserve's hawkish tone promising even more interest rate hikes.

There are hopes that the sharp rate increases from the Fed may already have dampened demand, causing US inflation to weaken, said Fawad Razaqzada, City Index and FOREX.com analyst.

The greenback's softness came even after yet another strong statement from a leading US central banker.

Fed Governor Christopher Waller on Friday was the latest to reaffirm the hawkish stance to combat rising prices.

He warned that lowering inflation will take time and higher rates, and said he supports another significant increase in the benchmark lending rate at the September 20-21 policy meeting.

In Asia, Hong Kong rose close to three per cent heading into a long weekend.

There was also some cheer from news that inflation in China eased slightly in August, giving the government more room to introduce more economy-supporting measures, though the recovery remains hostage to leaders' strict zero-Covid strategy of growth-sapping lockdowns.