Global stocks and the euro rallied on Wednesday after the world's leading central banks acted jointly to provide cheaper dollar funding for European banks facing a cash crunch.
The U.S. Federal Reserve, the European Central Bank and other central banks moved to ensure that financial markets rocked by the euro zone's escalating debt crisis can tap much-needed dollar swaps used for funding.
Dollar funding strains have increased in Europe as U.S. money market funds have pulled their lending to European banks on fears of exposure to the debt crisis. The banks need to finance foreign operations and liabilities denominated in dollars.
The surprise emergency move, which also involved the central banks of Britain, Canada, Japan and Switzerland, recalled coordinated action taken to steady global markets when the financial crisis erupted in 2008.
Given the U.S. dollar funding tensions of late, this global central bank coordination is a sign that folks in the right places are getting it, said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.
By no means does this address all of the issues facing markets, and we remain worried European Union policymakers might drop the ball, but it removes one roadblock and signals that perhaps more help is on the way, Goncalves said.
Wednesday's move came after euro-zone finance ministers agreed to bulk up their bailout fund but acknowledged they may need International Monetary Fund help.
Stocks on Wall Street closed more than 4 percent higher. Global stocks as measured by MSCI's all-country world index soared 3.6 percent and European stocks also closed up 3.6 percent.
U.S. dollar-denominated Nikkei futures gained 2.4 percent.
The Dow Jones industrial average closed up 490.05 points, or 4.24 percent, at 12,045.68. It was the largest daily points gain for the Dow since March 2009, the depth of the financial crisis. The Standard & Poor's 500 Index added 51.77 points, or 4.33 percent, to 1,246.96. The Nasdaq Composite Index was up 104.83 points, or 4.17 percent, at 2,620.34.
Also boosting sentiment was monthly data for November that suggested the U.S. economy was solidly on the way to recovery. The U.S. private sector added the most jobs in nearly a year, while business activity in the U.S. Midwest grew more quickly than expected.
RALLY'S ROOTS IN CHINA
The rally in global stock markets started earlier in the day when China's central bank moved to ease credit strains by cutting reserve requirements for its commercial lenders for the first time in nearly three years.
The Chinese measure and the coordinated move by the other major central banks come amid growing concern that the global economy is on a slippery slope as the euro zone struggles to tackle its huge sovereign debt woes.
The banking measures bolstered the appetite for risk, lifting assets such as stocks and commodities while prompting investors to dump the safe-haven dollar and U.S. government debt.
The dollar index fell 0.8 percent and the euro gained 0.9 percent to $1.3439.
It's a clear indication that policymakers are beginning to take credit issues in Europe very, very seriously, Boris Schlossberg, director of FX research at GFT in Jersey City, New Jersey, said of the coordinated action.
We're clearly seeing some very big stresses in the global banking system, and they wanted to do a pre-emptive strike. The fact that this was a coordinated move took the market by surprise and lifted all risk trades, Schlossberg said.
The yield on the benchmark 10-year U.S. Treasury note briefly rose above 2.1 percent for the first time in more than two weeks. Its price was last down 26/32 in price to yield 2.08 percent.
Brent crude futures retreated as an unexpected rise in U.S. oil inventories stemmed an early rally sparked by the central bank action.
ICE January Brent crude traded in London settled down 30 cents at $110.52 a barrel.
U.S. crude for January delivery pared gains and settled up 57 cents at $100.36 a barrel.
Gold rose nearly 2 percent, its biggest three-day rally in more than a month, as investors piled into bullion as a hedge against currency depreciation after the central bank action.
You are seeing an enhancement of the loose monetary situation around the world and continued currency devaluation, and that's what causing the rise in gold today, said Michael Cuggino, portfolio manager of the Permanent Portfolio Funds.
Inflation was as much a risk yesterday or two days ago than it is today, said Cuggino, whose firm manages $15 billion in assets.
U.S. gold futures for February delivery settled up $31.40 at $1,750.30 an ounce.
(Additional reporting by Gene Ramos, Frank Tang, Gertrude Chavez-Dreyfuss, Caroline Valetkevitch and Chris Reese in New York; Writing by Herbert Lash and Rodrigo Campos; Editing by Chizu Nomiyama and Dan Grebler)