World stocks rally on hunt for risk, yen soft

Tuesday's data showing a fall in the pace of U.S. home construction, which followed Monday's report on weak home-builder confidence, suggested that the housing market could stay as a drag on the U.S. economy.

"A sudden implosion of the housing sector, or some other black swan, could take markets abruptly to the point where contemplation of a severe economic downturn leads to declining risk appetite," HBOS Treasury Services said in a client note.

"As yet, however, the general tone of economic data is sufficiently mixed to preclude fears of a housing collapse."

With abundant liquidity chasing yield, the victim of this risk-seeking environment has been the yen as investors borrow in the low-yielding currency to buy high-return assets.

The yen hit a 16-year low against the Australian dollar, while it set a 20-year trough versus the New Zealand dollar.

The euro traded at 165.86 yen, within half a yen of Tuesday's lifetime high. It was steady at $1.3428.

Sterling hit a two-week high against the dollar and short sterling futures fell after the Bank of England minutes showed bigger-than-expected opposition to its decision to keep interest rates on hold this month.

Euro zone government bonds were higher, extending a technical rebound. The September Bund future was up 23 ticks.

The market is awaiting clues on the rate outlook from Fed speakers, including San Francisco Fed President Janet Yellen, New York's Timothy Geithner and Richard Fisher from Dallas.

London benchmark Brent crude oil was down almost one percent, partly on news a general strike in Nigeria had so far failed to interrupt crude shipments.