By Marc Jones
LONDON (Reuters) - The U.S. dollar slid while bonds and shares rallied on Monday after the withdrawal of Lawrence Summers from the race to head the Federal Reserve suggested a more gradual approach to tightening monetary policy.
Further whetting risk appetite was a growing expectation of a diplomatic solution to the Syrian crisis after a Russian-brokered deal averted U.S. strikes for now. That helped propel world shares to just short of a five-year high.
European bourses were quick to catch on after a strong day in Asia, with London's FTSE, Frankfurt's Dax and Paris's CAC 40 opening 0.8 - 1 percent higher to lift the pan-regional FTSEurofirst 300 0.75 percent.
Summers' surprise decision came just before the central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its asset purchases from the current pace of $85 billion a month.
Investors wagered that U.S. monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job.
Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale it back more quickly than the more dovish Yellen, who is currently second in command at the Fed.
"Clearly the dollar doesn't like the idea it could be Yellen at the helm because of the interpretation that QE (stimulus) could be in place for longer," said Jane Foley, senior currency strategist at Rabobank.
"The weakness of data more recently, the retail sales on Friday for example, has also bought home that we are still a little way from the U.S. having a resilient recovery ... so I think Summers's withdrawal has touched a bit of a raw nerve."
It was even possible a first rate rise could be pushed out into 2016, rather than 2015 as currently planned, added Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, he said she would most probably prioritise reducing the jobless rate.
"Yellen looks like the clear front-runner, and seems to be the public's popular choice," he said.
"The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more 5.5 percent, not 6.5 percent."
The euro was up more than half a U.S. cent at $1.3370, after hitting its highest in almost three weeks. The dollar also dropped against sterling and the Swiss franc.
It proved more resilient against the yen, which was weighed by its status as a safe-haven, and pared early losses to stand at 98.72. Liquidity was lacking with Japanese markets closed for a holiday on Monday.
Stock futures for the S&P 500 and Dow Jones industrial average climbed over 1 percent to 1,698.30 and 15,376.06 respectively.
MSCI's broadest index of Asia-Pacific shares outside Japan gained 1.5 percent to their highest since early June. South Korean shares added 1 percent, Australia 0.5 percent and Indonesia 1.7 percent.
PUSHING OUT THE HIKE
Sentiment was underpinned by Saturday's deal between Russia and the United States to demand that Syrian President Bashar al-Assad account for his chemical arsenal within a week and let international inspectors eliminate all the weapons by the middle of next year.
In debt markets, futures for the U.S. Treasury 10-year note leapt three-quarters of full point following Summers' withdrawal from the Fed race, a sizable move, as investors took yields lower.
Cash Treasury paper yields dropped to a month-low, going as far as 2.8031 percent before edging back up to 2.8162 percent in early European trading.
The more distant Eurodollar contracts rallied as the market pared back expectations for how quickly the Fed might finally start to tighten, as opposed to just tapering its stimulus.
Contracts from late 2014 out to 2016 all enjoyed double-digit gains suggesting a hike was now considered more likely in 2015, rather than in late 2014.
The prospect of a more protracted easing cycle would be a big relief to emerging markets from India to Brazil which have been hurt by expectations offshore funds would switch to developed markets as yields there rose.
In commodities markets, gold recouped some of last week's losses, with the metal rising to $1,327 an ounce, from around $1,308, while copper lifted off a five-week low.
Oil prices declined as the likelihood of a U.S. strike on Syria seemed to recede further. Brent crude lost $0.52 to $111.15 a barrel, while NYMEX crude shed 66 cents to $107.55 CLc1>.