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By Carolyn Cohn and Ankur Banerjee
LONDON/SINGAPORE, Dec 30 (Reuters) - World stocks were steady on the last trading day of the year as markets digested U.S. data and the dismantling of China's zero-COVID policy, but the global index was heading for a 20% drop over a year marred by high inflation and war in Europe.
The dollar, a beneficiary of rising U.S. interest rates, was on track for its best annual performance in seven years.
The Federal Reserve and other central banks have been fighting inflation in the face of supply chain shortages and an energy crisis due to the COVID-19 pandemic and oil producer Russia's invasion of Ukraine.
"This has been very much a Fed-driven equity market throughout the year," said David Bizer, managing partner at investment manager Global Customized Wealth.
"The market has been trying to anticipate when the Fed is going to hike, how fast and how far."
U.S. stocks closed 1-2.5% higher on Thursday, buoyed by data showing rising U.S. jobless claims, which suggested Fed hikes might be starting to cool demand for labour.
Markets anticipate the Fed funds rate peaking near 5% in the middle of next year, from the current 4.25-4.5%.
The Fed has raised rates by a total 425 basis points since March.
Quarter and year-end book-squaring also lifted stocks, Bizer said.
But S&P 500 futures lost a little froth on Friday, falling 0.5%.
The Dow Jones index is heading for an 8.5% drop on the year, while the S&P 500 is eyeing a 19% fall.
European stocks fell 0.5% and were on course for a 12% annual drop. Britain's FTSE 100, which houses several exporters, was down 0.2% but was bound for a rise of more than 1% in 2022.
MSCI's world equity index was heading for its largest annual drop since the global financial crisis of 2008, when it slid more than 40%.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.38%, but is set to end the year down 19%, its worst performance since 2008.
Japan's Nikkei was unchanged on the day, down 11% on the year.
China's blue-chip CSI 300 Index was up 0.4% on the day but down 22% on the year, while Hong Kong's Hang Seng Index rose 0.2% on the day but fell 16% in 2022.
Chinese leaders have pledged to step up policy adjustments to cushion the impact on businesses and consumers from a surge in COVID-19 infections.
China's health system has been under stress due to soaring cases since the country started dismantling its "zero-COVID" policy at the start of the month, with several countries imposing or considering imposing curbs on travellers from China.