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A fresh burst of optimism that the US economy was weathering the global financial storm better than had been feared helped fuel another strong advance for equity markets this week.

It also underpinned a powerful rally in the dollar - which in turn sent commodity prices sharply lower.

The mood was helped by the announcement of further co-ordinated action by the Federal Reserve and other central banks to ease money market stress.

"Market sentiment has improved visibly over the last few weeks and the idea that the worst of the financial crisis might be behind us has gained some credibility," said Marco Annunziata, UniCredit chief economist.

"However, there is a risk that the market, tired after long months of gloom, may now be getting ahead of itself."

The Federal Reserve laid the foundations for this week's improvement at its policy meeting as it slowed the pace of interest rate cuts and hinted that it might take a pause in its easing cycle at its next meeting in June.

"The Federal Open Market Committee, by lowering rates only 25 basis points, removing the reference to 'downside risks to growth' and promising to act 'as needed' - rather than 'in a timely manner' - to achieve its mandate, clearly signalled to the market that future actions would depend on incoming economic data," said Camilla Sutton, currency strategist at Scotia Capital.

Subsequent reports on US manufacturing activity, personal consumption and employment added weight to the view that the economy might be holding up better than feared.

Indeed, Stephen Stanley, chief economist at RBS Greenwich Capital, said Friday's news of a 20,000 fall in non-farm payrolls last month - much better than the forecast 75,000 drop - supported his suspicion that the first quarter was probably about as bad as things were going to get.

He did, however, caution against getting carried away. "Payrolls were still negative, and I would be shocked if the unemployment rate [which slipped to 5 per cent in April] has put in a cyclical peak already."

By contrast, the economic picture in the eurozone remained gloomy - heightening speculation it may not be long before the European Central Bank cuts interest rates to stimulate activity.

Larry Hatheway, chief economist at UBS, said the dollar's recovery against the euro mostly reflected signs of weaker eurozone growth and peaking inflation.

"The euro is at risk as markets reassess the probability of ECB easing this year and next," he said.

Weak German retail sales and purchasing managers' data, plus a sharp drop in the European Commission's economic sentiment index, all underscored recent un-ease about the eurozone outlook.

"Both consumer and business confidence indices have weakened markedly in recent months, heightening concerns over cyclical sectors that are particularly reliant on consumer spending and business investment," said Diane Vazza, head of global fixed income research at Standard & Poor's.

There was also a stream of negative economic indicators in the UK while the Bank of Japan left interest rates on hold and slashed its economic growth forecasts.

Equity markets across the globe had a positive week. Late in New York, the S&P 500 index closed up 0.3 per cent for a gain of 1.1 per cent over the week. The pan-European FTSE Eurofirst 300 index rose 2.6 per cent, its third successive weekly advance. In Japan, the Nikkei 225 rose 1.3 per cent to a four-month high.

Emerging market equities had a broadly positive week, with the MSCI EM index nearing a three-month high. Brazil's Bovespa index advanced strongly after Standard & Poor's upgraded its sovereign credit rating to investment grade.

US and European credit spreads continued to fall, with the iTraxx Europe down 11 basis points over the week and the US CDX 18bp lower.

Government bonds rallied for much of the week following recent steep declines, although the US jobs data triggered a sharp sell-off.

The yield on the rate-sensitive two-year Treasury rose 9 basis points on Friday to 2.46 per cent, leaving it 3bp higher over the week. In Europe, the two-year Schatz yield was 3bp lower over the week at 3.84 per cent.

In the currency markets, the dollar touched a five-week high against the euro and a two-month peak against the yen on speculation that the next move for US rates might be upwards.

In commodities, the dollar's rally sent prices lower virtually across the board. West Texas Intermediate, the benchmark US oil price, hit a record high of $119.93 a barrel on Monday before suffering a sharp decline. It closed at $116.32 on Friday in New York. Gold touched a four-month low below $850 an ounce.

Money markets still showed signs of stress. Three-month euro interbank funds chalked up their twelfth successive weekly advance, although dollar and sterling rates eased over the week.