Asian shares rose on Thursday as encouraging manufacturing data soothed fears about the global economic fallout from the euro zone debt crisis, but the euro lost steam as the ongoing Greek debt talks reminded investors of the complexity of the problem.
Financial spreadbetters expected Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC-40 <.FCHI> to open up flat to marginally higher.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> climbed as much as 1.4 percent to a five-month high of 438.674, with Australia and China leading the gains.
Japan's Nikkei average <.N225> closed up 0.8 percent, brushing off a system glitch that suspended trading of some major blue-chip shares in the morning. <.T>
The euro rose to a high of $1.3197, having reached a high of $1.32187 on Wednesday, before paring some gains to stand steady around $1.3170. The dollar held above a three-month low against the yen around 76 yen hit on Wednesday.
U.S. factory activity expanded at its strongest pace in seven months in January, while the manufacturing sector in Germany and China showed resilience to adverse effects from the ongoing euro zone debt crisis.
The manufacturing data has given the market a temporary break from risk aversion, but it is very vulnerable with some doubts over how much the positive mood would be sustained, said Mitsuru Sahara, chief FX manager at Bank of Tokyo Mitsubishi-UFJ in Tokyo.
London copper slipped on Thursday while Brent oil was supported by supply concerns from Iran. Gold hit a near two-month high earlier on the back of the euro's advance.
The market is digesting the supportive PMI numbers, which have confirmed that industrial activity looks considerably better compared to Q4 last year, but there's some uncertainty, especially over the funding stress in Europe, said Stefan Graber, a Credit Suisse Private Banking analyst based in Singapore.
The Australian dollar, seen as a gauge for risk appetite, hit a five-month high of $1.0758 on Thursday, buoyed by a record trade surplus for 2011 as the resource-rich country benefited from exporting gold and coal.
A firmer euro supported bullion, lifting spot gold up 0.4 percent to $1,751.30, its highest in nearly two months.
The recovery in risk appetite weighed on the dollar, keeping its index measured against key currencies <.DXY> near an eight-week low of 78.623 hit on Wednesday. Intervention fears kept the dollar/yen in narrow ranges, with players building long dollar/yen positions slightly, Sahara said.
Analysts at Barclays Capital said that January saw a rise in virtually all asset classes, due in part to investors buying back assets they spent most of 2011 selling.
Risks in the euro area have not disappeared, however, posing a threat to the rally: A clear resolution on Greek restructuring remains elusive, Barclays said.
Greece has yet to finalize a deal on the long-awaited debt swap with its private bond holders, which is vital to securing a bailout from global lenders to avoid a default.
Bankers said the bond swap deal, which will mean real losses of about 70 percent for Greek bond holders, is basically done. But the second bailout and any official sector participation must be agreed on before a deal can be announced as all elements are interlinked.
Optimism that the euro zone debt crisis may avoid a turn for the worse revived some demand for the region's sovereign debt, sending yields down for some highly indebted countries recently shunned by investors due to concerns about their funding ability.
Yields on Portuguese, Spanish and Italian debt fell and the easing tension pulled down European interbank lending rates, which had already been helped by the European Central Bank's commitment in December to keep abundant funds in the system.
In Japan, bond prices recovered on a strong 10-year debt sale, after sentiment was hit earlier by a media report saying a top Japanese bank has drawn up a contingency plan to deal with a sharp decline in government bond prices.
The report underlined fears that such a drop could be on the horizon. Government debt yields have stayed compressed despite growing global scrutiny over high sovereign debt levels.
Asian credit markets strengthened, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing sharply by 9 basis points.
(Additional reporting by Melanie Burton and Jane Lee in Shanghai; Editing by Richard Borsuk)