LONDON: European and Asian stock markets rallied Thursday, with the United States set to avoid defaulting on its debt, at least temporarily.

The dollar was down against main rivals ahead of key US jobs data due Friday.

Oil prices dropped on profit-taking after recent strong gains.

"After a recovery in US markets last night that points towards a solid open for Wall Street, European markets are firmly on the up," noted Chris Beauchamp, chief market analyst at IG trading group.

US senators neared agreement in the small hours of Thursday to stave off a catastrophic credit default after Democrats said they were close to accepting an offer from the Republicans to raise the debt limit for two months.

The deal would represent the first breakthrough in a partisan staring match that risked leaving the United States unable to service its debt after the estimated deadline of October 18, which would have shattered the US economy and led to a global recession.

A decision by US President Joe Biden and Chinese counterpart Xi Jinping to hold a virtual meeting also provided a much-needed boost to trading floors that have been starved of good news.

Economies have battled a string of problems in recent weeks, including surging inflation, an expected beginning of reduction in economic stimulus and a growing energy crisis.

But with just days to go before the United States runs out of cash, top Senate Republican Mitch McConnell proposed a truce, meaning Democrats can vote to hike the debt ceiling allowing the government to pay its bills until December.

Democrats indicated their support for the move, which would mean avoiding missing US repayment obligations that many experts and top officials including Biden and Treasury Secretary Janet Yellen had warned would tip the economy into recession and cause another financial crisis.

The offer removed an increasingly dark cloud hanging over markets and sent Wall Street's three main indexes jumping out of a slumber to close Wednesday in positive territory.

And Asia picked up the baton on Thursday with Hong Kong -- which has been battered this year by China's tech clampdown, security concerns and the China Evergrande crisis -- up more than three percent as bargain-buyers moved in.

Tokyo also rose, having fallen for eight straight days.

London, Frankfurt and Paris were up more than one percent in European afternoon deals.

Concerns about an energy crunch were also eased slightly after the US Energy Secretary Jennifer Granholm suggested unlocking some of the country's vast crude reserves to keep a lid on prices, which this week hit seven-year highs.

The cost of a barrel of oil has roared higher as the global economy reopens from Covid-19 lockdowns, while the approaching northern hemisphere winter has led to the price of natural gas doubling from last month.

The run-up in the energy market has ramped up fears that inflation -- already surging owing to the global recovery and supply bottlenecks -- will continue to spike higher, forcing central banks to wind in their ultra-loose monetary policies earlier than envisaged to prevent prices running out of control.

All eyes are on the Federal Reserve, which has signalled it will begin tapering its bond-buying programme before the end of the year, bringing an end to the easy money that has helped drive the global equity and economic rebound.