Global stocks and the euro rallied on Wednesday after the world's leading central banks agreed to cut the cost for European banks to borrow much-needed dollars.
The U.S. Federal Reserve, the European Central Bank and four other central banks acted jointly to ensure that financial markets rocked by the euro zone's escalating debt crisis have sufficient cash.
Dollar funding strains have increased in Europe as U.S. money market funds pulled their lending to European banks over fears of exposure to the debt crisis. The dollar swaps let the banks finance foreign operations and liabilities denominated in the U.S. currency.
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 the night before to bulk up their bailout fund but acknowledged they may need International Monetary Fund help.
Global stocks as measured by MSCI's all-country world index soared 3.1 percent. European stocks extended gains to close up 3.6 percent and U.S. dollar-denominated Nikkei futures gained 2.1 percent.
With less than an hour of trading left in New York, the Dow Jones industrial average gained 389.85 points, or 3.37 percent, to 11,945.48. The S&P 500 gained 40.66 points, or 3.40 percent, to 1,235.85. The Nasdaq Composite
gained 82.40 points, or 3.28 percent, to 2,597.91.
Further encouraging investors, monthly data in November suggested the U.S. economy was moving more solidly toward recovery. The U.S. private sector added the most jobs in nearly a year, while business activity in the U.S. Midwest grew faster than expected.
RALLY'S ROOTS IN CHINA
A 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 comes 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 0.96 percent to $1.3443.
It's a clear indication that policy-makers 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 in 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 22/32 in price to yield 2.066 percent.
Oil prices rose. Brent crude gained 2 cents to $110.84 a barrel. U.S. crude gained 75 cents to $100.54.
Benchmark copper prices shot up to a session high of $8,000 before settling at $7,885 a tonne, more than 5 percent higher.
Spot gold prices rose $33.80 to $1,748.09 an ounce.
(Additional reporting by Gertrude Chavez-Dreyfuss, Caroline Valetkevitch and Chris Reese in New York, Simon Falush, Ethan Bilby, Marius Zaharia, Anirban Nag and Ana Nicolaci da Costa in London; Writing by Herbert Lash and Rodrigo Campos; Editing by Chizu Nomiyama)