European shares were set for a stronger open on Friday and the euro steadied as investors hoped for a big policy move from European finance ministers to combat the region's growing debt crisis.
Coordinated central bank action around the world to boost liquidity for European banks, at a time when some institutions have been shut out of short-term lending markets, has raised speculation that policymakers may take bold steps to hold the euro zone together.
U.S. Treasury Secretary Timothy Geithner holds talks with European finance ministers in Poland on Friday on the possibility of leveraging the euro zone's bailout fund to help resolve the debt crisis.
Equity markets in Asia rallied, taking heart from the S&P 500 <.SPX> closing above the 1200 level, which had proved to be a stiff resistance over the past two weeks.
Japan's Nikkei <.N225> closed up 2.3 percent, climbing above a steep trendline formed off intra-day highs in August and September.
With today's rise, it is like we are cautiously climbing up a wall but at the same time we're thinking that the wall may collapse if we go up any further, said Kenichi Hirano, a strategist at Tachibana Securities.
The benchmark MSCI index of Asia Pacific stocks outside Japan rose 2.2 percent <.MIAPJ0000PUS>, with financials providing the biggest boost.
The index has rebounded more than 4 percent from a 14-month low hit on Wednesday. But it is still down more than 13 percent in the year to date after a global market rout in August.
While stocks across Asia rallied, volumes remained light and were significantly below levels seen during the selloffs over the past six weeks, suggesting most of the gains came from short-covering rather than real buying.
U.S. stock futures were little changed, highlighting caution in the markets over Europe and the sputtering American economy. Factory and job data on Thursday showed further weakness, bolstering the case for more action to support growth.
Highlighting weak consumer sentiment and the intense backlash that companies are facing if they disappoint investors, Blackberry-maker Research In Motion
With several events next week that could influence markets such as a widely anticipated two-day U.S. Federal Reserve meeting, President Barack Obama's speech on deficits and Chinese manufacturing data, hedge funds were cutting some of their bearish bets.
With the incremental dollar a hedge fund dollar, chances of this squeeze turning into a rally rises with every somewhat credible EU rumor, said Hong Kong based trader at an American brokerage, adding that long-only funds were still holding back, and even looking to sell into strength.
Funds bailed out of shares of European retailer Esprit Holdings <0330.HK> which lost over a fifth of their value on Friday in Hong Kong and suffered their worst two-day drop in history after disappointing first-half results on Thursday.
Weakness in Asian currencies as foreign investors offloaded on regional bets and thin equity volumes, however, suggest investors remain skeptical that the euro zone debt crisis can be solved by providing temporary emergency funds for banks.
Obviously it's not a long-term solution, we need to see some resolution to the sovereign debt issue to give market confidence we'll have stronger growth over the medium-term, said Spiros Papadopoulos, a senior market economist at National Australia Bank.
Certainly these policy measures will help improve confidence in the short-term, he added.
This week has seen hedge funds of all stripes and mutual funds selling Asian currencies at a rapid pace and the move continued on Friday in spite of the stable euro.
The euro slipped 0.2 percent to $1.3850 but was actually up 2.1 percent on the week, with the swift move up through $1.3750 making traders nervous about opening bets against the currency ahead of the ECOFIN meeting and with the next Federal Reserve meeting on Sept 20-21.
The weakness in Asian currencies has spilled over to the Australian dollar because of the antipodean currency's use as a play on investor risk-taking.
The Australian dollar closed flat on the day but is down about a percent on the week.
Spot gold prices slid over 1 percent to $1,769.95 an ounce, on course for the biggest weekly decline since January 2009.
The combination of resilient equities, a rebound in the euro and a bearish double-top chart pattern in gold have combined to cast a shadow on the safe-haven asset.
(Additional reporting by Ayai Tomisawa in TOKYO and Cecile Lefort in SYDNEY; Editing by Kim Coghill)