Financial markets were upbeat on the first trading day of 2010 on Monday, with Asian stocks hitting a 17-month high and the U.S. dollar up against major currencies on hopes U.S. job figures this week will reflect a sustained economic recovery.

Major European stock markets were expected to open mixed, with Britain's FTSE 100 <.FTSE> seen down 0.4 percent while Germany's DAX <.GDAXI> was seen up 0.1 percent, according to financial bookmakers. U.S. stock futures rose 0.4 percent.

Emerging Asian currencies strengthened on expectations for a broader recovery in exports as key Western markets improve, but the trend is posing challenges to regional policymakers struggling to maintain stable currencies.

Throughout the last months of last year we highlighted the expectation of Asian currency outperformance and for that to show up best against G3 excluding the U.S. dollar, said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong, in a note.

That theme is still very much in play and we look for further outperformance in coming weeks and months, he said.

Investors focused on bullish indicators, such as figures on Monday showing manufacturing employment in South Korea at the highest since January 2008, and ignored the few bearish ones, like a much larger-than-expected fourth-quarter contraction of Singapore's economy.

The main event of the week will be the U.S. payrolls numbers on Friday. The median expectation is for a decline of 20,000 jobs in December, though economists at banks like BNP Paribas, Barclays Capital and Nomura expect to see the first jobs growth in two years.

Japan's Nikkei share average <.N225> rose 1 percent to its highest close since Oct 3, 2008, led by companies in the technology sector.

Shares of Japan Airlines Corp <9205.T> soared 31 percent and were the top gainer in the Nikkei after local media reported a state-owned bank would double its credit line to the struggling airline.

The MSCI index of Asia Pacific stocks outside Japan was up 0.3 percent <.MIAPJ0000PUS> by midafternoon at its highest level since July 2008. Technology stocks again outperformed, building on solid gains last year, while financials lagged.

The index gained nearly 70 percent in 2009, its best performance since 1993. Analysts see more gains this year but at a much slower and possibly more volatile pace as interest rate hikes loom in many countries.

The Thomson Reuters regional equity index was up 0.5 percent <.TRXFLDAXPU>.

HOW TO PLAY 2010

Many strategists do not expect 2010 to deliver the blockbuster stock market returns of 2009, but many are still forecasting double-digit gains, especially in emerging markets.

Analysts at Bank of America-Merrill Lynch have been saying emerging markets are in a structural bull market. The firm is looking for the MSCI all-country world index <.MIWD00000PUS> to rise about 17 percent this year and recommends large-cap emerging market financial and consumer-related stocks and developed multinationals.

Emerging Asian currencies shot higher on positive growth prospects, following last week's December manufacturing data from China and South Korea. The dollar fell 0.7 percent against Korean won to 1,155 won and was down 0.85 percent against the Indonesian rupiah to 9,340 rupiah.

Betting on Asian currency strength in 2010 has been a common theme among strategists. For example, Goldman Sachs believes currencies in emerging Asia will benefit from strong growth, higher inflation and supportive external balances.

The bank said the Indonesian rupiah, the Philippine peso and Malaysian ringgit would likely strengthen the most because of their respective authorities' more relaxed attitude to appreciation. The rupiah gained over 17 percent last year against the U.S. dollar.

Among the biggest risks for investors in 2010, strategists list trade protectionism as well as monetary or fiscal policy missteps as policymakers unwind emergency stimulus measures as economies improve.

A big dollar rally could also roil global markets.

The dollar rose last week to its highest since early September 2009, but market watchers are unsure if its newfound strength was a year-end blip or a signal that the greenback may be embarking on a long-term uptrend.

The dollar strengthened on Monday because of rising U.S. bond yields, not investor risk aversion.

The euro slipped 0.1 percent to $1.4304, with dealers continuing to slash bets on the common currency, even after it fell 4.6 percent in December.

March 10-year U.S. Treasury futures were down 0.3 percent. In December, the contract had its biggest monthly decline since July 2003.

U.S. crude for February delivery rose 0.9 percent to $80.10 a barrel, supported by news Russia has halted oil supplies to Belarussian refineries after failing to agree on terms for 2010.

(Editing by Kim Coghill)

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