(Adds U.S. market open, byline, dateline; previous LONDON)
* Global stocks set for best week since Jan. 11
* Euro jumps, dollar set for biggest weekly drop in three months
* Treasury yields tumbled to more than two-month low
* U.S. oil retreats from 2019 high on soaring production
By Herbert Lash
NEW YORK, March 15 (Reuters) - A gauge of global equity markets hit a fresh five-month high on Friday on investor optimism over U.S.-Chinese trade talks and hopes a new Brexit vote next week will prove successful, but the dollar headed to its biggest weekly loss since early December.
Hopes of avoiding a chaotic exit from the European Union lifted stock indexes in Europe to highs last seen in October while substantive progress on U.S.-Sino trade talks as reported by China's state-run news agency also buoyed sentiment. Minister Theresa May's deputy warned lawmakers that unless they approved her Brexit divorce deal after two crushing defeats, Britain's exit from the EU could face a long delay. dollar fell broadly, dragged lower by weak U.S. economic data that sent the euro higher and helped gold prices to rebound from below $1,300 an ounce. The pound paused for breath but stayed on course for its biggest weekly gain in seven weeks.
U.S. manufacturing output fell for a second straight month in February and factory activity in New York state was weaker than expected this month, further evidence of a sharp slowdown in economic growth early in the first quarter. reports added to recent weak U.S. economic data and underscored the Federal Reserve's "patient" approach toward hiking interest rates, a trend that favors equities, said Rahul Shah, chief executive of Ideal Asset Management.
"Slower growth in the U.S. enables the Fed to be more patient, so that's why you're seeing some dollar weakness," Shah said.
Higher U.S. rates than elsewhere among major economies will draw capital from foreign markets and ultimately put upward pressure on the dollar going forward, Shah said.
"Since the Fed is more likely to be patient now you're starting to see slower growth in the U.S. along with high-relative rates. That makes lower volatility stocks more appealing," he said.
MSCI's all-country world index .MIWD00000PUS , gauge of equity performance in 47 countries, gained 0.41 percent while the FTSEurofirst 300 index .FTEU3 of leading European shares rose 0.27 percent.
On Wall Street, the Dow Jones Industrial Average .DJI fell 18.82 points, or 0.07 percent, to 25,691.12. The S&P 500 .SPX gained 7.4 points, or 0.26 percent, to 2,815.88 and the Nasdaq Composite .IXIC added 51.42 points, or 0.67 percent, to 7,682.33.
Fed officials are scheduled to meet next week to assess the economy and the course of U.S. monetary policy. While no change in rates is expected officials might take a more cautious view on the global economy after a volatile week in currency markets.
Sterling GBP= rose 0.22 percent to $1.3268 and the dollar index .DXY fell 0.25 percent. The euro EUR= gained 0.26 percent to $1.1331 while the Japanese yen JPY= strengthened 0.18 percent versus the greenback at 111.53 per dollar.
Benchmark 10-year and 2-year U.S. Treasury yields fell to their lowest levels since early January, pushed lower by the weak U.S. economic data and the growing perception the Fed will stand pat on raising rates for the rest of the year.
The benchmark 10-year U.S. Treasury note US10YT=RR rose 10/32 in price to push yields lower at 2.5961 percent.
U.S. crude futures briefly hit a 2019 high but later retreated along with benchmark Brent oil as worries about the global economy and robust U.S. production put a brake on prices.
West Texas Intermediate (WTI) crude oil futures CLc1 fell 22 cents to $58.39 a barrel. Brent crude futures LCOc1 slid 50 cents to $66.73.