The euro rose to its highest in a week as strong demand at auctions for Italian and Spanish government debt on Thursday softened some worries over the region's debt crisis, while world stocks edged higher.
Comments by the president of the European Central Bank bolstered the euro's rally, and boosted gold to a one-month high.
Concerns that the euro zone economy is struggling through a debt crisis, and possibly in recession, while the U.S. economy is slowly improving have pressured the euro and lifted euro-priced gold.
But in a positive development, Spain on Thursday sold twice as much three-year debt as it needed and Italy paid less than it did a month ago on one-year securities at their first auctions of 2012 as cheap money lent to banks by the ECB in December fuelled demand for shorter-term debt.
Italy will sell up to 4.75 billion euros of debt, including its three-year benchmark issue, on Friday.
European Central Bank President Mario Draghi cited signs of stabilization in the euro zone, which boosted the common currency. The euro was last up 0.9 percent at $1.282 against the U.S. dollar.
As expected, the ECB left its key interest rate unchanged at a record low 1.0 percent at Thursday's policy meeting as it assesses the impact of back-to-back cuts and a slew of other measures unleashed late last year that are showing signs of helping fight the euro zone debt crisis.
The ECB's decision to hold rates steady at 1 percent is enough sign of confidence that European financial leaders believe the Eurozone economy will stabilize and the crisis can be managed, said Jonathan Lewis, chief investment officer at Samson Capital Advisors, with assets under management of around $7 billion.
Though criticized as cautious and slow moving, the ECB is demonstrating it is a staunch defender of the value of its currency.
Spain's risk premium, the spread between yields on Spanish and German benchmark bonds, narrowed to its tightest level since January 3 after the auction results and the yield on its 10-year bonds eased to 5.14 percent, near the low for the year.
The yield on Italian 12-month bills fell to 2.735 percent from the near-6 percent Italy paid to sell one-year paper at a mid-December auction and the lowest level since June 2011.
Many euro zone worries remain.
Another European bond test is expected Friday, when Italy offers up to 4.75 billion euros of debt.
Also, Greece has said it may need more money from European partners if not enough private creditors sign up for a voluntary swap of bonds to cut the country's debt burden.
WORLD, U.S. STOCKS GAIN
In stock markets, world stocks as measured by the MSCI World Equity Index <.MIWD00000PUS> were up 0.4 percent, while U.S. stocks ended at a five-month high for a third day.
On Wall Street, the well-received sovereign debt sales were offset by downbeat U.S. economic data and concern about the Friday Italian bond sale.
A profit warning by Chevron Corp
Data showed U.S. retail sales rose at the weakest pace in seven months and the number of Americans applying for first-time jobless benefits rose last week.
The question that has been haunting the market for some time is the underlying strength of the U.S. economy. Although we have had some strong numbers recently, today's numbers were less than expected, disappointing the market, said Quincy Krosby, market strategist for Prudential Securities.
The FTSEurofirst index <.FTEU3> index of top European shares ended down 0.3 percent.
Disappointing news on European manufacturing also weighed on sentiment, reinforcing the view that the euro zone economy entered a recession in the final quarter of 2011.
GOLD UP, BUT OIIL, U.S. BONDS SLIP
Spot gold was up 0.3 percent at $1,645.90 an ounce, having touched a one-month high at $1,661.71.
The 25-day correlation-log between gold and euro fell to 0.56 from a one-year high of near 0.8 in late December, a sign that the positive link between two has been weakening.
Some decoupling between gold and the euro could create more upside for gold. This may imply that gold prices might not be hostage to shifts in risk-on, risk-off investor sentiment, as has recently been the case, said James Steel, chief commodities analyst at HSBC.
Brent and U.S. crude futures both ended lower, reversing sharp gains from earlier in the session on a report that the European Union could delay a ban on Iranian exports by six months.
Brent February crude fell 98 cents, or 0.87 percent, to settle at $111.26 a barrel.
In the U.S. Treasury market, debt prices slipped slightly after investors showed little interest in buying 30-year bonds at the Treasury's final coupon auction of the week.
The Treasury sold $13 billion in reopened 30-year bonds at a high yield of 2.985 percent, awarding 69.8 percent of the bids at the high.
The 30-year Treasury bond, up 10/32 in price before the auction, fell afterward. In late trade, however, it was barely changed on the day, yielding 2.97 percent. The benchmark 10-year note was last down 8/32, the yield at 1.93 percent.
(Reporting by Caroline Valetkevitch; Additional reporting by Richard Hubbard in London and Gertrude Chavez-Dreyfuss, Frank Tang, Robert Gibbons and Ellen Freilich in New York; Editing by Dan Grebler and Andrew Hay)