* Bin Laden death gives initial perception of reduced risk
* Stocks, dollar rise; oil falls
* Wall Street set for gains
By Jeremy Gaunt, European Investment Correspondent
LONDON, May 2 (Reuters) - The killing of Al Qaeda leader
Osama bin Laden by U.S. forces prompted investors on Monday to
strip some of the risk premium underpinning world asset prices,
lifting the dollar, boosting stocks and weakening commodities.
Wall Street looked set to open with solid gains, lifted also
by signs of economic growth in Europe and India.
Oil, gold and silver prices all fell as reaction to the
death of the West's most wanted man swept across thinly traded
financial markets.
But investors warned that this kind of reaction to major
news is often only temporary, and the initial gains were already
cooling.
"Markets across the globe received a bit of a boost ... as
news broke that U.S. forces had killed Osama bin Laden. However,
like many euphoric bounces, they are often short-lived,
especially given the possibility for reprisal attacks from
extremists," said Ben Potter, market strategist at IG Index.
Holidays in many countries -- including China, Hong Kong,
Singapore, Thailand and Britain -- meant trading was limited.
Nonetheless, the initial reaction was a boost for U.S.
assets and a modest fillip for equities.
The dollar rebounded from a three-year low against a basket
of currencies <.DXY>, where it had languished as a result of
perceptions that the U.S. Federal Reserve is in no hurry to
tighten its ultra-loose monetary policy.
The dollar was up 0.1 percent, well off its earlier daily
highs. The announcement of bin Laden's death triggered
short-covering demand for the dollar after the dollar index
<.DXY> had hit its weakest since mid-2008.
Analysts said the news would have only a limited impact on
the dollar in general because interest rates, not geopolitical
events, are the overriding driver.
"Risk as a driver of the FX market has been much less than
it has been ... The main trend is relative dollar weakness due
to monetary policy," said Kasper Kirkegaard, currency strategist
at Danske Bank in Copenhagen.
Dollar-sensitive oil and gold fell, dipping by as much as 2
percent at some point. U.S. crude <CLc1> was down close to 1.8
percent below $112 a barrel compared with its 31-month peak of
$114.18 set on Friday.
Silver tumbled 10 percent, its steepest fall since late
2008, hit by the dollar, increased margins for futures trading
and a technical overhang after a 170 percent rally over the last
12 months to a record high last week.
"There is nothing from a fundamental perspective to cause a
fall this large. Silver has been the most rapidly appreciating
of the metals in the past months and if there was one that
looked a bit frothy it was silver," said Ben Westmore,
commodities economist at National Australia Bank.
STOCKS GAIN
European shares <>, minus Britain's usual
contribution, gained around 0.2 percent, lifting MSCI's
all-country world stock index by 0.2 percent.
Japan's Nikkei average <> earlier rose 1.4 percent on
the day, closing above the closely watched 10,000 mark for the
first time since the March 11 earthquake.
Economic news played into the mood. Euro zone factories
ramped up output and prices last month while manufacturers in
India also powered ahead, according to business surveys.
In China, monetary tightening looked to be biting more
deeply than expected as the factory sector there cooled.
U.S. Treasury yields initially pushed higher across the
curve, with the 10-year <US10YT=RR> rising from a six-week
trough of 3.273 percent. It was later at 3.299 percent.
"By lowering national security risks overall, this is likely
to bolster equity markets and lower U.S. Treasury prices in a
reverse flight to quality movement," said Mohamed El-Erian,
Chief Executive Officer and Co-Chief Investment Officer at
PIMCO, which oversees $1.2 trillion in assets.
"Oil markets are likely to be the most volatile given their
higher sensitivity to the tug of war between lower risk overall
and the possibility of isolated disturbances in some parts of
the Middle East and central Asia," he said.
(Additional reporting by Ian Chua, Harpreet Bhal, Jan Harvey
and Naomi Tajitsu; Editing by Catherine Evans)
