The euro and global stock markets surged higher today, bolstered by China's knock-down of a report saying it was looking to cut its holdings of euro zone sovereign debt.
The People's Bank of China's assertion that Europe is a key investment market for its foreign exchange reserves helped lift the euro from near four year lows. The central bank called yesterday's Financial Times report groundless.
"The fact that they came out with a statement today suggesting they're not going to sell the euro doesn't mean that they're not concerned. But they're looking at the euro from a long-term perspective and the base-case scenario is that the euro zone is not going to crack," said David Watt, senior currency strategist, at RBC Capital Markets in Toronto.
Commodity prices rose as the dollar fell, with the added benefit of improving US oil demand and a drop in crude stockpiles. Gold rose slightly.
US and European stock markets extended gains while government debt prices fell as risk appetite favoured equities. Bargain hunters picked through the beaten-down market felled by fears Europe's debt crisis could spark a credit crunch and undermine the global economic recovery.
"The market is bouncing off oversold, but I think the big catalyst this morning is comments coming out of China that tempered concerns about the Chinese government possibly trimming back its $600 billion plus of euro zone bond holdings," said Fred Dickson, chief market strategist at DA Davidson & Co in Lake Oswego, New York.
In late morning in New York, the Dow Jones industrial average was up 219.99 points, or 2.21 per cent, at 10,194.44. The Standard & Poor's 500 Index was up 26.89 points, or 2.52 per cent, at 1,094.84. The Nasdaq Composite Index was up 63.06 points, or 2.87 per cent, at 2,258.94.
Equity markets shrugged off a report showing the US economy grew at a slower pace than previously estimated in the first quarter as business investment slackened.
Heading into the close of European trade, the pan-European FTSEurofirst 300 index rose 2.76 per cent to 998.82, its best level in a week. However, the index remains down about10 per cent from a mid-April peak on worries about Europe's debt crisis.
MSCI's all-country world stock index rose 2.52 per cent.
The euro rose 0.71 per cent at $1.2253 while the dollar fell against a basket of major trading-partner currencies, with the US dollar index down 0.32 percent at 86.838.
China has been trying to diversify its currency reserves to reduce the dollar's dominance in favour of the euro and yen to curb risks.
Yesterday, the euro collapsed 1.5 per cent after the Financial Times reported China's State Administration of Foreign Exchange (SAFE) was meeting foreign bankers because of concerns about its exposure to debt troubles in Europe.
SAFE, the arm of the central bank, manages China's $2.4 trillion in foreign exchange reserves - the world's largest stockpile.
Separately, the Kuwaiti Investment Authority denied a local media report that it too was reducing its exposure to euro zone investments. The sovereign wealth fund stated there was no change to its long-term investment strategy including Europe.
The initial reports did cut the euro's gains but the currency has since recovered ground.
In response to the better risk appetite, safe-haven benchmark 10-year US Treasuries traded 1-10/32 lower, driving the yield up to 3.34 per cent.
Euro zone government bond futures hit a session low of 128.17, 55 basis points lower on the day as equities rallied.
US. light sweet crude oil rose $2.53, or 3.54 per cent, to $74.04 per barrel, and spot gold prices rose $5.20, or 0.43 pe rcent, to $1215.10. The metal hit a record high of $1,248.95 in mid-May.