* World stocks rally, Asian shares at 29-month high
* China service PMI strong, blue chips highest since mid-2015
* Dollar near two-year trough as Fed commits to easy policy
* Graphic: 2020 asset performance http://tmsnrt.rs/2yaDPgn
* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh (Updates throughout, adds charts)
By Dhara Ranasinghe
LONDON, Aug 31 (Reuters) - Stocks hovered near record highs on Monday and were set for five straight months of gains as investors bet on central banks keeping the stimulus taps open for years to come as the world tries to overcome the coronavirus crisis.
Aided by an upbeat reading on China's service sector, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS hit its highest since March 2018. Europe, French water and waste firm Veolia's plans to buy a near 30% stake in smaller peer Suez for 2.9 billion euros also lifted stocks .STOXX , with Paris .FCHI , Frankfurt .GDAXI and Milan .FTMIIB up 0.3-0.7%. London was closed for a public holiday, U.S. stock futures pointed to a positive Wall Street open ESc1 1YMc1 .
MSCI's world equity index .MIWD00000PUS , which has risen more than 6% in August, is set for a fifth month of gains as massive monetary and fiscal stimulus outweighs concern about the outlook for a world economy battered by the coronavirus.
Stock markets were lifted last week by Fed Chair Jerome Powell committing to keep inflation at 2% on average, allowing prices to run hotter to balance periods when they undershot.
The risk of higher inflation in the future, assuming the Fed can get it there, has pushed up longer-term Treasury yields and sharply steepened the yield curve.
Yields on 30-year bonds US30YT=RR jumped almost 16 basis points last week and were last at 1.53%, 139 basis points above the two-year yield US2YT=RR . The spread is approaching the June gap of 146 basis points, the largest since late 2017.
"We know now the Fed is behind inflation and will be less strict than before, so it would be logical to see higher yields," said Eric Vanraes, fixed income portfolio manager at Eric Sturdza Investments in Geneva.
"But at the same time, we are in a tough situation regarding the economy and the Fed cannot allow a huge steepening of the curve, otherwise its efforts to fight the crisis would have been destroyed," he said.
A host of Federal Reserve officials are set to speak this week, kicking off with Vice Chair Richard Clarida on Monday.
Tokyo's Nikkei .N225 closed up more than 1%, buoyed by news Warren Buffett's Berkshire Hathaway (NYSE:BRKa) BRKa.N had bought more than 5% stakes in each of the five leading Japanese trading companies. Minister Shinzo Abe's resignation on Friday had hurt shares on concern about future fiscal and monetary stimulus policies. Such worries were allayed somewhat by news Chief Cabinet Secretary Yoshihide Suga, a close ally of Abe, would join the race to succeed his boss. A slimmed-down leadership contest is likely around Sept. 14. some point, I think we will see a correction in equities but not a collapse, and that would be normal and good news for the market because equity levels are too high and disconnected to the economic reality and earnings," Vanraes added.
DOLLAR BLUES
The dollar recovered some ground against its peers, but was set for its fourth straight month of losses.
It was 0.5% firmer at 105.92 yen JPY=EBS , but drifted lower against the euro as the European session wore on. Europe's single currency was last up 0.16% at $1.1923 EUR=EBS , having climbed 0.9% last week.
The dollar index was a touch softer at 92.215 =USD , heading back towards recent two-year lows. It has shed over 1% this month, on track for its worst August in five years.
The Fed's shift to an average inflation target has hurt a U.S. currency hit in recent months by concerns about the coronavirus and its impact on the economy.
"The thin end of holiday markets today, means it's easy to overinterpret (market moves)," said Chris Bailey, European strategist at Raymond James. "The big test is coming though at $1.20."
Elsewhere, gold moved in step with the dollar, last trading at around $1,965 an ounce XAU= -- a touch firmer on the day. GOL/
Brent crude oil touched its highest in five months, underpinned by a 30% cut in Abu Dhabi crude supplies and encouraging Chinese data. crude futures LCOc1 were last up 1.3% at $46.40. U.S. West Texas Intermediate crude CLc1 was at $43.46 a barrel, up 49 cents, or 1.1%. O/R
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http://tmsnrt.rs/2ihRugV MSCI's World Stock Index
https://tmsnrt.rs/2DcGXQD Global markets, asset performance
https://tmsnrt.rs/3hJ4UOL
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