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GLOBAL MARKETS-Brexit deal fuels sterling while economic optimism bolsters stocks

* Brexit trade deal buoys sterling, European stocks

* Investors wind down for Christmas break in bullish mood

* Graphic: 2020 asset performance tmsnrt.rs/2yaDPgn

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh (Updates with trading in U.S. markets, adds commentary)

NEW YORK, Dec 24 (Reuters) - The British pound rose on Thursday as Britain and the European Union clinched a free trade deal, while a global gauge of stocks edged upward amid investor optimism toward economic growth.

Britain hammered out the final details of a narrow agreement with the EU just seven days before it exits the trading bloc.

Sterling momentarily extended its climb against the dollar on the news, rising as much as 0.94%, but then pared gains. Analysts said the pound’s 5% rally since early November meant that much of the Brexit relief had already been priced into the currency.

Still, the pound was last up 0.35% at $1.3547 on Thursday.

“What was billed as an oven-ready deal has taken a nearly a year to defrost, but the fact it now seems so much more palatable for both sides is providing some much needed Christmas cheer for investors,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The trade deal helped European equities edge higher as well. The STOXX index rose 0.13%.

U.S. stocks also advanced slightly in thin volume ahead of the Christmas holiday as investors maintained hopes of economic recovery, despite blocked attempts in Congress to alter a $2.3 trillion coronavirus aid and government spending package. President Donald Trump had previously stated that he might not sign the bill without significant changes.

Optimism about a full-scale roll-out of COVID-19 vaccines next year has kept stocks buoyed despite the delays in further stimulus, said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group. Moreover, he added, investors still expect greater fiscal stimulus to come under President-elect Joe Biden next year.

“The first thing to recognize is that this is not a full-blown stimulus,” he said. “It’s really a stop-gap measure. President-elect Biden has stated we still have more work that needs to be done.”

The advances in U.S. and European stocks, along with previous gains in Asia, helped send MSCI’s world equity index 0.09% higher.

On Wall Street, the Dow Jones Industrial Average rose 45.09 points, or 0.15%, to 30,174.92, the S&P 500 gained 6.52 points, or 0.18%, to 3,696.53, and the Nasdaq Composite added 25.72 points, or 0.2%, to 12,796.84.

Trading in U.S. stocks and bonds will end early on Thursday, and the markets will be closed on Friday for Christmas.

Among currencies, the dollar index shed earlier losses to edge 0.02% higher as the pound cut its gains. The euro dipped 0.00% to $1.2187.

U.S. Treasury yields dropped in light volume. Benchmark 10-year Treasury notes last rose 7/32 in price to yield 0.933%, from 0.955% late on Wednesday.

Oil prices likewise fell, though Brent remained above $50 a barrel as a drop in U.S. stockpiles spurred demand hopes. Brent and U.S. crude edged down less than 1%.

Gold prices rose slightly as sterling kept the dollar’s gains in check. Spot gold added 0.3% to $1,877.45 an ounce.

Copper prices dipped but remained near their highest levels since 2013, while other industrial metals rose. (Reporting by April Joyner; Additional reporting by Tommy Wilkes in London, Stanley White in Tokyo and John McCrank in New York; Editing by Kirsten Donovan/Mark Heinrich)

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