Business News : U.S. economy hopes lift European stocks

LONDON (Business News) - A better outlook for the U.S. economy boosted European stocks and supported the euro on Friday, but any gains in the holiday-thinned markets are likely to prove short-lived with concerns about the euro zone debt crisis undiminished.

U.S. stock index future pointed to Wall Street edging higher and extending a rally into a fourth session, as a report that the Federal Reserve could hold rates down for longer than previously expected fuelled the upturn in sentiment.

But euro zone fears kept a lid on any optimism.

"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 was up around 0.2 percent for the day at $ 1.3075, holding above a recent 11-month low of $ 1.2945. It is however 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."

The Wall Street Journal said late on Thursday the Federal Reserve could commit to keeping rates near zero right out to 2014. The report said the Fed could announce the decision at its next policy meeting on Jan 24-25.

On Thursday the U.S. reported the lowest level of weekly jobless claims since April 2008 [ID:nL1E7NLBBS] while the Thomson Business News/University of Michigan's consumer sentiment index showed a rise. [ID:nL1E7NM1RL]

"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.

Congress, after months of bitter infighting, is poised on Friday to pass a payroll tax cut extension that President Barack Obama argues is vital to the health of the economy.

MSCI's world equity index gained around 0.4 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 0.8 percent in anemic volumes. Banks were among the big gainers, extending a timid pre-Christmas rally after a dismal year, with Banco Santander (SAN.MC) up about 1.0 percent and BNP Paribas (BNPP.PA) up 1.3 percent.

ECB FUNDING BOOST SOOTHES

Key euro zone bank-to-bank lending rates dropped as banks hoovered up almost half a trillion euros from the European Central Bank's first-ever injection of three-year loans.

The ECB's mid-week provision of 490 billion euros of the cheap longer-term cash to over 500 of the region's banks - the largest ever amount of liquidity pumped into the financial system - was expected to ease the impact of a wave of capital outflows by U.S. money market funds.

However, banks still appear to be reluctant to lend to each other, with use of the European Central Bank's overnight deposit facility reaching a new record high for the year on Thursday.

Outgoing ECB executive board member Lorenzo Bini Smaghi also suggested in comments in the Financial Times on Friday that the central bank should consider launching a U.S.-style asset purchase program if economic conditions change across the 17-country region.

Bini Smaghi told the Financial Times that, if required, "I would see no reason why such an instrument tailor-made for specific characteristics of the euro area should not be used."

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, whose is also leaving 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.

Yields on Italian 10-year bonds were steady at 6.92 percent, back within a whisker of the 7 percent mark seen as unsustainably high over the long-term, with the Spanish equivalent 3 basis points lower at 5.39 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 also supported commodities, with copper - sensitive to expectations of industrial demand - rising nearly 1.0 percent to $ 7,614 a metric ton, on course for its first weekly gain in three weeks.