Signs of renewed momentum in the giant U.S. economy boosted European stocks and supported the euro on Friday, but any gains in holiday-thinned markets are likely to prove short-lived with concerns about the euro zone debt crisis undiminished.
There's no doubt that events in the euro area in the first quarter of next year... have the potential to have a profound impact across the globe, said Chris Scicluna, an economist at Daiwa Capital Markets.
The single currency edged up 0.1 percent to $1.3065, holding above a recent 11-month low of $1.2945, although it remains down around 2.1 percent on the year.
The dollar is still seen as a funding currency when risk appetite improves and people will sell dollars on the back of that, said Chris Walker, currency strategist at UBS.
But we still see uncertainties in the euro zone outweighing and look for a move towards $1.25 in the next few months, he added.
The United States reported the lowest level of weekly jobless claims since April 2008 on Thursday, as well as a rise in the Thomson Reuters/University of Michigan's consumer sentiment index.
This improved set of data we've had through Q4 in the U.S. is at least something to be encouraged about, said Daiwa's Scicluna.
MSCI's world equity index gained around 0.3 percent since the data was published <.MIWD00000PUS>, but remains on track for a fall of about 12 percent in 2011.
The pan-European FTSEurofirst 300 index gained around 0.5 percent.
ECB FUNDS SOOTHE
The European Central Bank's mid-week provision of 490 billion euros of cheap longer-term cash to over 500 of the region's banks - the largest ever amount of liquidity pumped into the financial system - is expected to support debt markets.
The loans are expected to ease the impact of a wave of capital outflows of U.S. money market funds from European banks that has gummed up the interbank market, and should also support bank shares.
Outgoing ECB executive board member Lorenzo Bini Smaghi also suggested in comments in the Financial Times on Friday that the ECB could give in and adopt quantitative easing to boost the euro zone economy if deflation risks emerge across the 17-country region.
His comments are the strongest indication yet that the central bank could expand its policy tools to prevent a possibly disastrous economic slump in continental Europe, although Bini Smaghi himself steps down at the end of December.
Meanwhile, fellow ECB Executive Board member Juergen Stark, who also steps down at the end of the month, was quoted as saying that Europe should not use the International Monetary Fund to get around the ban on central banks financing governments and that current plans might breach that principle.
Practically, I don't see any countries other than euro zone states that want access to the money. It is an attempt to circumvent the ban on direct monetary financing in Europe, Stark told German daily Die Welt in an interview.
Yields on Italian 10-year bonds were 4 basis points higher at 6.97 percent, back within a whisker of the 7 percent mark seen as unsustainably high over the long-term, with the Spanish equivalent little changed at 5.42 percent.
Unsurprisingly, in 2011 Italian bonds <.QW4AP> have been one of the worst performers, posting losses of 5.65 percent overall with longer-dated paper losing almost 11 percent <.QW4U>.
The rosier picture painted by the U.S. data is also supporting commodities, with copper, which is sensitive to expectations of industrial demand, rising 1.0 percent to $7,615 a tonne, on course for its first weekly gain in three weeks.
(Additional reporting by Neal Armstrong)