The euro pared gains on Tuesday after Moody's put Portugal on review for a possible downgrade, while world stocks rose, driven by bargain-hunting investors betting on stronger global growth next year.
Cold weather in Europe and the United States kept oil prices firm for the third straight session, while copper hit an all-time high, buoyed by supply disruption from Chile. U.S. Treasury yields were steady.
Moody's Investors Service warned it may cut debt-ridden Portugal's A1 rating by one or two notches after a review that will take no more than three months.
The same ratings agency last week cut Ireland's credit rating by five notches to Baa1, the third last investment grade rank, and put Spain's rating on review for a possible cut.
Concerns that the euro zone sovereign debt crisis will spread from Greece and Ireland to Portugal and even possibly Spain and Italy have weighed on global markets.
The Moody's announcement on Portugal has knocked some of today's optimism out of the euro but these credit announcements are not completely out of the blue any more so the negative reaction is always going to be a little bit more dampened than six months ago, said Jane Foley, senior currency analyst at Rabobank.
I don't think this announcement on its own will be capable of knocking the euro out of its range.
The euro rose 0.3 percent to $1.3156, after trading as high as $1.3200 earlier in the session, boosted by a short-covering rally in Asian trade. It also hovered near all time lows against the Swiss franc, at 1.2652 francs.
The dollar <.DXY> fell 0.3 percent against a basket of major currencies.
Portuguese yields were higher on the day, but actually fell a touch after the Moody's announcement. The premium investors demand to hold 10-year Portuguese government bonds over German Bunds widened by 2 basis points on the day to 365 bps, while Spanish 10-year spreads moved out by 4 bps to 260 bps over Bunds.
People are expecting further actions from the ratings agencies anyway, said Charles Diebel, head of market strategy at Lloyd's TSB in London.
Portugal's stocks <.PSI20> put on 0.8 percent, while Europe's FTSEurofirst 300 <.FTEU3> index gained 0.7 percent.
The thing that may have changed in the last few weeks is the fact that the bond market has sold off, said Michael O'Sullivan, head of global asset allocation at Credit Suisse.
That has been probably causing a lot of people to confront the fact that in a recovery part of the business cycle government bonds tend to be worse performing than equities.
In Asia, Japan's Nikkei average <.N225> gained 1.5 percent to hit a seven-month closing high.
Global stocks measured by MSCI All-Country World Index <.MIWD00000PUS> advanced 0.5 percent. The benchmark carries a one-year forward price-to-earnings of 12.5 times, Thomson Reuters Datastream showed.
In terms of sector valuations, energy, financials, telecoms and the healthcare sector carry one-year forward P/E with a 4 to 13 percent discount to the world index, while the forward P/E for materials and utilities are in line.
Oil rose for the third straight session, up 0.3 percent on the back of cold weather in Europe and the United States, and copper prices rose 1.2 percent, their third day of gain, after a halt in shipments by the world's No. 3 copper mine, Chile's Collahusai.
Yields on benchmark 10-year U.S. Treasuries held steady at 3.3416 percent, after hitting a seven-month high of 3.5675 percent last week.
(Additional reporting by Neal Armstrong, Emily Flitter, William James and Anirban Nag in London; editing by Patrick Graham)