A sunnier global economic outlook and news most U.S. banks passed stress tests sent European shares close to eight-month peaks on Wednesday and pushed the dollar to fresh highs as prospects of more stimulus from major central banks dimmed.
With the same factors having driven the main stock market indexes to their biggest gains of the year on Tuesday, futures signaled a mixed opening on Wall Street.
The upsurge in risk appetite crimped demand for safe-haven government debt, with Treasury bond prices falling to their lowest since late October and equivalent German paper dipping to a three-week trough.
The dollar made broad gains against a range of currencies .DXY, hitting an 11-month high against the yen of 83.61 yen while the euro fell to a one-month low of $1.3031.
It may prove a temporary phase, but at present the U.S. dollar is benefiting from higher relative yields reflecting the outperformance of the U.S. economy over other major developed economies, Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, said.
After the Federal Reserve described the country's output as expanding moderately, compared to the modest growth description in its previous statement, many analysts took the view that a further round of asset buying by the U.S. central bank is now less likely.
Hints of a brighter outlook crept across the Atlantic as a slight rise in euro zone industrial production data for January ended two consecutive monthly falls and pointed towards the bloc's eventual recovery.
But the impact of high oil prices kept optimism in check, weighing on growth prospects and dampening hopes that Europe's debt crisis might be easing.
The Fed's latest statement, which made no direct mention of policy easing, was in line with recent stances adopted by the European Central Bank and the Bank of Japan to wait and see the impact of measures already taken.
Major central banks, including the Fed, ECB and the BoJ, have stepped off the gas pedal and we'll likely need another deterioration in economic data before additional liquidity is provided, analysts at Morgan Stanley said in a note.
U.S. BANKS PASS TEST
An early announcement by the Fed that most large U.S. banks, with the notable exception of Citigroup, had passed stiff capital adequacy tests, added to the positive outlook for the economy, boosting demand for equities while safe-haven bonds fell.
U.S. 30-year Treasury bond yields moved up to four-month highs of 3.34 percent. The key 10-year note was yielding 2.19 percent, a level not seen since late October, and compared with a yield of 1.9 percent on equivalent German government bonds.
The FTSE Eurofirst .FTEU3 index of top European shares rose 0.7 percent to 1,103.35, a level not seen since last July. The gains were led by financial stocks with the STOXX Europe 600 bank index .SX7P up 2.3 percent to take this year's gains to over 20 percent.
The MSCI world equity index .MIWD00000PUS, also helped by gains in Asia, rose 0.2 percent to 334.30 for a gain of nearly 20 percent since its November 25 low.
The upbeat mood helped Italy to sell 6.0 billion euros ($7.9 billion) of government bonds at the lowest yields seen October 2010 with demand strengthened by Greece's successful debt restructuring deal.
Euro zone countries have formally approved the second, 130 billion euro bailout package for Greece that is designed to keep Athens funded until 2014.
The gains in the dollar and a view the United States has large stocks of crude oil to deal with the more buoyant economy saw oil prices dip slightly.
Brent crude was fell 43 cents to $125.79 a barrel after settling at an 11-month high of $126.22 on Tuesday. U.S. crude eased 26 cents to $106.45.
The scaling back of expectations of additional monetary easing by the Fed and the gains in the dollar saw gold touch its lowest levels since late January. Spot Gold slipped to $1,657 per ounce, down just over 1 percent.