By Katanga Johnson and Sujata Rao

WASHINGTON/LONDON (Reuters) -A week-long rally in world stock markets showed few signs of abating on Thursday as investors looked beyond the Omicron COVID-19 variant, bolstering gains for stocks and oil, while the dollar slipped.

Sentiment was supported by signs that governments, despite coronavirus cases hitting record highs, are trying to limit the economic damage by relaxing rules on isolation rather than resorting to lockdowns.

MSCI’s gauge of stocks across the globe gained 0.14%, while the pan-European STOXX 600 index rose 0.31%.

On Wall Street, the Dow Jones Industrial Average rose 0.19%, the S&P 500 gained 0.24% and the Nasdaq Composite added 0.53%.

Despite concerns, the view seems to be that the highly transmissible Omicron COVID-19 variant will be less lethal than feared, said Holger Schmieding, chief economist at Berenberg.

“Markets are back trading the rebound story, the recovery story for 2022,” Schmieding said, noting higher bond yields reflected expectations of economic recovery and subsequently, a reduced pace of central bank support.

There was also relief in Asia, where South Korea’s 5.1% industrial output surge may indicate some easing of supply chain problems. Chinese shares got a nearly 1% lift from Beijing signaling lower interest rates in 2022, though they are set to end 2021 down 5.5%.

Japanese shares, in their last trading day of the year, slipped 0.4% for a 4.9% annual gain but short of a three-decade top reached in September. Shares in semiconductor superpower Taiwan ended with a 24% annual jump.

However, persistent inflation and a resulting hawkish turn by the U.S. Federal Reserve is a source of concern for markets, with investors starting to price in a first rate hike as early as March.

“We have these headwinds from the pandemic, we had headwinds from energy prices and sky-high inflation rates… but there is a fair chance that many of these factors if not all of these factors will ease in Q1 next year,” said Jussi Hiljanen, strategist at SEB. “But for a few months to come it will be very volatile and markets will be tested.”

New claims for U.S. unemployment benefits fell in the week leading up to Christmas and benefits rolls slid to their lowest level of the pandemic era a week earlier, the Labor Department said on Thursday. The data showed no impact on employment from the rapidly spreading Omicron variant.

Two-year U.S. Treasury yields have shot up 55 basis points since September to stand at 0.75%, near the highest since March last year. However, reflecting expectations of a relatively short and shallow rate-rise cycle, 10-year yields have reacted far less, rising around 1/32 in price to yield 1.541%.

The Fed outlook has combined with recent Omicron jitters to underpin the U.S. dollar, which is set for a second month of gains. The greenback rose 0.096% against a basket of currencies, bouncing off a three-week low touched on Wednesday when it was hit by the risk appetite revival.

The euro traded down 0.1% at $1.1337,

The yen has run into broad year-end selling over the past week, with the dollar reaching its highest since mid-November at 115.2 yen.

“The front end of the U.S. rates market is pricing more rate hikes back into the curve now so FX may be a battle, once again, between optimism about the global recovery and expectations about the Fed,” said Kit Juckes, a strategist at Societe Generale.

However, oil prices slowly rose, even amid demand growth concerns and news that China had cut its first batch of 2022 crude oil import quotas by 11% in a sign it would act against small inefficient refineries. [O/R]

U.S. crude recently rose 0.68% to $77.08 per barrel.

Brent, which has climbed more than 50% this year, was at $79.37, up 0.18% on the day.

(Reporting by Katanga Johnson in Washington;Additional reporting by Sujata Rao, Karin Strohecker and Julien Ponthus in London, Stefano Rebaudo in Milan and Wayne Cole in Sydney;Editing by Hugh Lawson, Carmel Crimmins and Dan Grebler)