European stock markets yesterday welcomed news of further US Federal Reserve stimulus, with key exchanges gaining close to 2.0 per cent, but the initiative drove down the dollar against the euro.
An announcement on Wednesday that the Fed would pump more cash into the flagging American economy sent Frankfurt and London to their best levels since June 2008, while Paris hit a seven-month high.
The US Central Bank announced it would launch a new €600 billion (€423 billion) asset-buying plan, a procedure known as Quantitative Easing (QE), in a bid to galvanise what is currently a softening US rebound.
But adding that amount of money to the economy would tend to dilute the value of the dollar, and, as expected, traders yesterday dumped the greenback.
The euro finished at $1.4214 against $1.4130 on Wednesday. The dollar also fell against the yen, dropping to 80.68 from 81.12. The euro and the dollar “started a roller-coaster ride after the (Fed) announcement but in the end the dollar came under pressure,” said analysts at Commerzbank.
“It is far from certain whether further bond purchases will help a recovery of the US economy. So far (Fed Chairman) Ben Bernanke has failed to provide an explanation of how further bond purchases are going to support the economy.”
On equities markets sentiment was noticeably upbeat.
“The market was afraid that the Fed would do the minimum, with only $400 billion,” said Franklin Pichard of Barclays Bourse in Paris.
“But that wasn’t the case and we are seeing solid gains.”
Some of the initial enthusiasm, however, began to wane late in the day on a report that new claims for US unemployment benefits resumed their upward climb last week, with a stronger than expected increase.
In London, FTSE 100 index of leading shares gained 1.98 per cent to close at 5,862.79 points while in Paris the CAC 40 jumped 1.92 per cent to 3,916.78 points. The Frankfurt DAX rose 1.77 per cent to 6,734.69 points.
Elsewhere there were gains of 1.36 per cent in Milan, 0.32 per cent in Madrid, 1.80 per cent in Amsterdam and 1.27 per cent on the Swiss Market Index.
US stocks also rallied, with the Dow Jones Industrial Average up 1.58 per cent at mid-day and the tech-heavy Nasdaq up 1.23 per cent.
Wall Street had steadily risen in recent weeks on expectations the Fed would take more action.
In Paris, European aerospace giant EADS, parent company of aircraft manufacturer Airbus, plunged 4.05 per cent after a Qantas Airbus A380 made a dramatic forced landing in Singapore after an engine failure.
In London, Rolls-Royce, the maker of the engine involved in the incident, fell 4.16 per cent.
Asian equities also responded positively to the news from the US central bank. Hong Kong put on 1.62 per cent, Tokyo soared 2.17 per cent and Shanghai added 1.85 per cent to finish close to a seven-month peak.