LONDON (Reuters) - European shares edged higher on Friday as more evidence that China's economy has stabilized lifted sentiment, although uncertainty over the U.S. Federal Reserve's next policy move limited gains.
Stock markets globally have inched lower for much of this week and the dollar has slipped to near a two-month low after mixed U.S. economic data unsettled expectations the Fed would start to trim its bond buying as early as next month.
Europe's broad FTSE Eurofirst 300 index .FTEU3 was up 0.1 percent in early trading following on from small gains in Asia, where the latest Chinese data helped stock indexes in Shanghai and Shenzhen post their best week in a month.
China reported that factory output in July rose 9.7 percent, beating forecasts, as retail sales grew 13.2 percent and inflation held steady. The data added to Thursday's trade figures showing exports from the world's second-largest economy running at a surprisingly strong pace.
The data pushed oil prices up towards $107 a barrel, after they hit their lowest levels in more than a month on Thursday.
The numbers indicate that the Chinese government's efforts to generate momentum in an economy that has slowed in nine of the past 10 quarters may be working, though most analysts say more evidence is needed.
"Broadly speaking, economic growth is stabilizing and recovering slightly, but we still need to see whether the momentum could be sustained," said You Hongye, an economist at China Essence Securities in Beijing.
MSCI's world equity index .MIWD00000PUS was barely changed as result and is on course for its worst weekly decline since late June, after speculation of an early end to the Fed's stimulus program surfaced.
When the Fed will begin tapering back the $85 billion a month it spends on bonds to help boost the world's biggest economy remains the market's main talking point with little expected to clarify the situation on Friday.
The uncertainty has left the dollar languishing near its weakest levels in nearly two months against a basket of other major currencies .DXY, while the euro has risen to a seven-week high of $1.3380.
"We're still of the view the Fed may wait until December to taper," Jane Foley, senior currency strategist at Rabobank, said.
"The market was very long of U.S. dollars assuming the Fed would taper sooner rather than later, and the Fed has pushed back against that, and the market now understands that even when tapering happens policy is going to remain accommodative," she said.
The softer tone to the dollar has also been led by an easing of yields on U.S. government debt as buyers returned amid the uncertainty over the Fed tapering.
The 10-year Treasury note was yielding around 2.58 percent on Friday not far from the 2.573 percent level hit on Thursday, its lowest since July 31, according to Reuters data.
(Editing by Susan Fenton)