Global stocks and the euro rallied on Wednesday after the world's leading central banks acted jointly to ensure financial markets rocked by the euro zone's escalating debt crisis have sufficient funding.
The U.S. Federal Reserve, the European Central Bank and four other central banks agreed to cut the cost of existing dollar swap lines starting next Monday, making it cheaper for cash-strapped European banks to get access to dollars.
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.
Global banks are obviously interconnected and thus 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 stocks on Wall Street also rose more than 3 percent.
The Dow Jones industrial average was up 395.37 points, or 3.42 percent, at 11,951. The Standard & Poor's 500 Index was up 40.09 points, or 3.35 percent, at 1,235.28. The Nasdaq Composite Index was up 83.34 points, or 3.31 percent, at 2,598.85.
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 major central banks of the developed world comes amid growing concern that the global economy is on a slippery slope as the euro zone struggles to decisively 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 government debt.
The dollar index fell 0.8 percent to 78.412, and the euro gained 0.9 percent to $1.3435.
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.
A higher-than-expected U.S. private-sector jobs report for November also improved sentiment. The ADP National Employment report indicated U.S. private-sector jobs grew by 206,000 this month, well above the consensus forecast of 130,000.
German bond yields fell and the benchmark U.S. 10-year Treasury note slid a point in price.
Ten-year German government bond yields slipped 3 basis points lower to 2.26 percent.
The benchmark 10-year U.S. Treasury note was down 26/32 in price to yield 2.08 percent.
Oil prices rose. Brent crude gained 2 cents to $110.84 a barrel. U.S. crude gained 75 cents to $100.54.
Spot gold prices rose $31.30 to $1,747.10 an ounce.
(Additional reporting by Gertrude Chavez-Dreyfuss 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; Editing by James Dalgleish and Jan Paschal)