World stocks rebounded on Tuesday and the dollar fell sharply, hitting new record lows against the euro and Swiss franc, as speculation swirled that the U.S. Federal Reserve would meet to cut interest rates.
Wall Street also looked set to open higher after sharp losses on Monday. Data on U.S. housing starts for October came in slightly stronger than expected.
But fears of further fallout from the credit crisis still rocked markets with trading in investment bank UBS and insurer Swiss Re briefly suspended as they fell on concerns over exposure to risky credit.
Swiss Re announced a $1.07 billion write-down on Monday.
In Britain, trading in troubled Northern Rock was also halted after it slumped more than 41 percent.
Credit fears have come back with a vengeance this week, dragging stocks sharply lower on Monday after Goldman Sachs told clients to expect $15 billion or more in write-offs from Citigroup as a result of mortgage losses.
This led to speculation on Tuesday that the Fed would hold an emergency meeting to cut rates. Although unsubstantiated, it gained momentum in markets and was cited in broker reports.
Such a move by the Fed would be highly unusual. The last time it changed the federal funds rate between formal rate setting sessions was just after September 11, 2001.
One result of Tuesday speculation, however, was to lift global stocks. MSCI's main world index was up 0.4 percent after losing around 1.7 percent on Monday. Emerging market stocks, however, were flat.
European shares gained despite general anxiety about banks.
We're not yet out of the woods. For that we would definitely need the U.S. market to regain some positive momentum, and that's not what we have currently, said Franz Wenzel, strategist at AXA Investment Managers in Paris.
The FTSEurofirst 300 index of top European shares was up 0.3 percent. The benchmark index fell 2.1 percent on Monday. Earlier, Japan's Nikkei average rose for the first time in four days. It ended up 1.1 percent at 15,211.52. The TOPIX rose 0.9 percent to 1,469.27.
DOLLAR AT NEW LOWS
The dollar fell to record lows against the euro and the Swiss franc while the low-yielding yen sold off broadly, partly on the Fed speculation.
Adding to dollar weakness was continued speculation that Gulf countries may be preparing to ditch their dollar pegs or at least revalue their currencies.
The euro rose above $1.48, a fresh all-time peak.
The dollar fell below 1.1071 Swiss francs to a record low. It was down 0.7 percent against a basket of six major currencies.
Euro zone government bond prices were mixed with the 10-year benchmark flat.
At current levels govvies are very expensive so there's room for a limited downward consolidation, said Patrick Jacq, euro zone interest rate strategist at BNP Paribas in Paris.
Citi's composite world government bond yield was at a low for the year.