Asia stocks struck two-month highs on Tuesday and higher-yielding currencies jumped against the yen as Washington's plan to relieve banks of toxic debt spurred investors to pick up riskier assets.
The gains in major Asian equity markets followed a 7 percent surge in the U.S. S&P 500 <.SPX>, which was also supported by a surprise rise in home sales that spurred hopes a recovery is taking hold in the battered housing market at the heart of the global credit crisis. <.N>
Financial shares extended their rally after investors cheered the U.S. Treasury's plan to free banks of up to $1 trillion in troubled mortgage securities and other loans, part of an array of measures designed to jump start lending and the economy.
Major European indexes were expected to open up between 1 percent and 1.7 percent, financial bookmakers said.
Oil prices dipped 15 cents to $53.65 a barrel after reaching a four-month high the previous day.
The revival in risk-taking boosted currencies such as the Australian and New Zealand dollars against the yen as carry trades -- borrowing in low-yielding currencies and buying higher-yielding ones -- showed signs of making a comeback.
As financial markets have stabilized, gauges of volatility have dropped and made carry trades seem more appealing.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> climbed 2 percent, taking gains to 28 percent from the five-year low hit last November.
But analysts were cautious about saying whether this rebound in stocks was the definitive one.
Even though the market rally seems to be a rather powerful one and may last in the short term, we would remain cautious on a more medium-term basis. In Asia, the data flow remains very gloomy, said market strategists at Calyon in a note to clients.
Asian currencies edged up and have recovered somewhat as foreign investors slowly shifted money back to the region.
Japan's Nikkei share average <.N225> climbed 3.3 percent and struck a two-month high. But the rebound in stocks showed some signs of running out of steam.
The Nikkei's 21 percent rise from its lows hit earlier this month meets the traditional definition of a bear market rally, and some technical indicators suggested the benchmark index has reached overbought levels.
S&P futures were down 0.2 percent, pointing to a weaker start on Wall Street.
BONDS AND DOLLAR DOWN
Safe-haven government bonds were on the defensive as global stocks rallied, but they have been supported by extraordinary measures by central banks to buy large chunks of debt outright to keep a lid on market yields.
The purchases, which in some cases have meant outright monetization of swelling government budget deficits, serve as one means of helping economic growth with short-term interest rates already near zero.
Ten-year Japanese government bond yields were flat at 1.260 percent, as some investors took advantage of an initial back-up in yields to buy paper as they eye the start of Japan's new business year in April.
The dollar slid back toward a two-month low hit against a basket of major currencies last week when investors seized on the Federal Reserve's decision to buy large amounts of Treasuries as a sign of the erosion of the world's reserve currency.
As the debate about the dollar's role intensifies, Chinese central bank governor Zhou Xiachuan said on Monday that the dollar could be replaced as the world's main reserve unit by the IMF's Special Drawing Right.
The comments suggest that big holders of dollar reserves, such as China, are mulling alternatives in considering a big shift in the global financial architecture that has ruled the post-World War Two period.
The dollar index -- a gauge of its performance against six major currencies -- dipped 0.1 percent to 83.395 <.DXY>. Among higher-yielding currencies, the Australian dollar was up 1.2 percent and hit a 4- month high near 69.50 yen.
(Additional reporting by Satomi Noguchi in Tokyo and Jungyoun Park in Seoul; Editing by Neil Fullick)