The euro rallied further on Monday from 10-month lows, buoyed by a burst of short-covering as the quarter draws to an end, while Chinese shares hit two-month highs as investors welcomed the launch of a futures index.

The euro bounced to as high as $1.3530 as traders continued to unwind bets against it after euro zone policymakers agreed on Thursday to create a safety net for debt-laden Greece.

The slightly more upbeat mood in Europe is expected to help European equities too.

Britain's FTSE 100 <.FTSE> was nearly half a percent higher, Germany's DAX <.GDAXI> gained 0.6 percent, and France's CAC 40 <.FCHI> was also up 0.5 percent.

Yet in Asia, some share markets were crimped by profit-taking, with Chinese stocks bucking the trend to jump 2 percent to a two-month high.

A long-awaited launch of China's first stock index futures in April had lifted Chinese shares as investors welcomed the expected boost to liquidity. That the futures would be based on large-cap stocks also put Chinese blue chips in focus.

Investors also shifted to large caps this morning because valuations of index heavyweights have lagged the market average by far after recent speculation in small caps, said Zheng Weigang, head of investment at Shanghai Securities.

The Shanghai Composite Index <.SSEC> was up 1.9 percent at 3,117 points, after breaking through the 125-day moving average at 3,099 points, which had offered stiff resistance over the past two months.

Zheng said gains in Chinese shares should be tempered by worries of the central bank tightening monetary policy this year to prevent its economy from overheating.

Indeed, Chinese shares have lagged their Asian peers this quarter. The Shanghai index is down over 4.5 percent since January, trailing a 1 percent rise in Asian stocks outside Japan.

Todd Martin, the Asian equity strategist at Societe Generale in Hong Kong, said the prospect of tighter monetary policies in Asia may continue to weigh on Asian stocks in the months ahead.

A stronger U.S. dollar may also encourage fund managers to shift money back to the United States, where earnings forecasts are comparably lower and have more room to surprise.

We do have some headwinds in Asia and Asia did outperform on the way up last year, Martin said. Asia is going to perform, but it may not do as well as the U.S. market.

Asian stocks outside of Japan have leapt 72 percent in the past year, far ahead of a 46 percent rises in the S&P 500.

The MSCI Asia Pacific index ex Japan <.MIAPJ0000PUS> was 0.6 percent higher by the afternoon.

Japan's Nikkei <.N225> was flat at 10,986.47 as investors took profits after the benchmark hit an 18-month high last week, but has still gained around 4 percent so far this year.

If the Nikkei manages to overcome resistance at 11,310, the 38.2 percent Fibonacci retracement of its 2007-2008 plunge, then the outlook may be as bright as suggested by the MACD and Ichimoku charts.

CURRENCIES

The euro pared gains to $1.3445 by the afternoon, but is still down 6 percent against the dollar this quarter, its worst since the height of the crisis in September 2008.

Worries about Greece and other weak euro zone members have raised questions about the sustainability of the single currency.

The U.S. dollar <.DXY>, on the other hand, is up over 4.5 percent since January, and up nearly 10 percent since hitting a 15-month low in November. It was down 0.3 percent on Monday however, hemmed in part by the euro's rebound.

While some market watchers thought the latest bounce in the euro may have wings, the latest data from the Commodity Futures Trading Commission suggested the euro has yet to win over many skeptics.

Net short positions had jumped over 1.5 times to nearly 75,000 in the week ending March 23, data had showed.

All eyes this week will be on the U.S. non-farm payrolls data on Friday. The consensus is for a gain of 190,000 jobs in March, the second month of job growth since the recession started in December 2007, and the largest increase since March of that year.

Other U.S. job data on Wednesday and Thursday could give clues on the non-farm number. Many markets around the world will be closed on the Good Friday holiday.

Elsewhere, oil prices were a touch firmer, helped by a weaker U.S. dollar, which also lifted gold prices to a two-week high.

(Editing by Jan Dahinten)

Germany China Japan United kingdom