European stocks opened at a two-week high on Friday while the yen slipped, as expectations grew of U.S. interest rate cuts that could stem the slowdown in the world's largest economy.
A U.S. rate cut in December is virtually priced in and Thursday comments by Federal Reserve Chairman Ben Bernanke reinforced the expectations, boosting appetite for risk.
The market is relieved the Fed is willing and able to come in and cut interest rates to prevent the economy from slowing, Barclays Capital strategist Henk Potts said.
By 0930 GMT, the FTSEEurofirst 300 index of top European shares was up 0.7 percent, with banks the top gainers. Earlier in Asia, Tokyo's Nikkei average touched a three-week high while the MSCI's measure of other Asian stocks climbed to two-week highs.
Emerging equities gained almost 1 percent.
Markets had posted healthy gains on Thursday after Fed Vice Chairman Donald Kohn boosted rate cut talk though Wall Street closed on a flat note after weak labor data.
Data on Thursday showed jobless claims at the highest since February, indicating the labor market may be the next sector of the economy after housing to experience a wobble.
That took the gloss off figures showing the U.S. economy posted its best performance in four years in the third quarter.
But sentiment picked up again after Bernanke told the Charlotte Chamber of Commerce that a resurgence in financial strains had dimmed the outlook for the U.S. economy, and the Fed would have to remain exceptionally alert and flexible.
If we take Mr. Bernanke's and Mr. Kohn's comments as implying that they will move towards easier rates again next month, which seems to be the consensus view, it clearly is helping risk appetite today, said Simon Derrick, head of currency research, Bank of New York Mellon.
The trades we are seeing are in line with that.
The yen fell broadly amid the extended recovery in equities and risk appetite, while hopes grew of U.S. plans to clean up the subprime mortgage problem that has rocked global financial markets.
Typically, lower interest rates would make the dollar less attractive against other currencies but investors are now seeing rate cuts as helping the greenback as they would cushion the economy from the shock of credit market problems.
The dollar climbed 0.2 percent against the yen to around 110.04 yen, recovering from a 2-1/2 year low hit on electronic trading platform EBS a week back.
The euro climbed a quarter percent to 162.38 yen while high-yielders like the Australian and New Zealand dollar also rose versus the Japanese currency. The euro was steady against the dollar around $1.4745.
Bond markets were mixed, with Treasuries recouping some earlier losses. Bernanke's comments had stemmed the dash to safe-haven assets that was fuelled by the weak labor data.
Benchmark 10-year Treasuries saw yields down 1.5 basis points to 3.92 percent but staying off the near four-year low of 3.7945 percent, hit earlier this month.
Probably the big driver here is still the fact that the Fed effectively confirmed it's going to move on December 11, said Robin Marshall, director of fixed income at NCL Smith & Williamson.
If you look at T-bill rates, the spreads widened out again to the August highs overnight. There's a lot of pressure on credit markets and funding, and in that environment the safe haven assets will continue to do well.
Euro zone Bunds opened flat to lower while Japanese government bonds rose, as the market took its cue from U.S. Treasuries. The yield on the 10-year benchmark Japanese government bond eased 1.5 ticks to 1.47 percent as a result.
On commodity markets copper ticked higher but oil fell below $91 per barrel, after giving up all its gains in the previous session on news a fire-damaged Canada-United States pipeline may resume operations within days.
Gold was hurt by the oil fall to slip below $800 an ounce.
Emerging market bond yields, a key gauge of risk appetite, saw spreads to U.S. Treasuries narrow 5 basis points to 252 -- more than 30 bps off recent two-year highs.
(Additional reporting by Ian Chua in Singapore, Toni Vorobyova and Emelia Sithole in London; editing by Ralph Boulton)