European stocks rallied yesterday and the euro hit a one-month dollar high after the Fed vowed to keep interest rates near zero for at least the next two years and Italian bond yields declined.
London’s FTSE 100 index of leading shares climbed 1.26 per cent to 5,795.20 points, while in Paris the CAC-40 index jumped 1.53 per cent to 3,363.23 points and in Frankfurt the DAX 30 soared 1.84 per cent to 6,539.85 points.
Madrid rose 1.85 per cent and Milan 1.71 per cent.
The European single currency surged as high as $1.3184 in afternoon trading despite Greece’s ongoing struggle to agree a writedown on its huge debts with its creditors, its highest level since December 21.
The euro later pulled back to stand at $1.3151 at 1700 GMT, still up from $1.3103 late in New York on Wednesday.
The US Federal Reserve said that it expects interest rates to stay at “exceptionally low levels” at least until late 2014, extending its forecast from the previously stated mid-2013.
Traders speculated that the central bank could also decide to implement another round of stimulus in the form of quantitative easing (QE).
“Yesterday’s news from the Fed pushing out the low interest rate target to 2014 has delivered a modicum of support in early European trade, with the FTSE nudging its way higher as a result,” said analyst Mike McCudden at online brokerage Interactive Investor.
“There’s also a growing expectation that we’ll see QE3 emerging from the Fed too, although with the market clearly supported by this line, any signs of delay could well initiate another round of broad-based selling.
“Eurozone debt concerns also remain very much front of mind and any hint of deterioration here could again see risk appetite plummet amongst investors.”
Yields on Italian 10-year bonds briefly dipped below the six-per cent threshold yesterday for the first time since early December in a sign of easing market concern about the country’s economic prospects, after another successful bond auction.
The yield had alarmingly soared over an unsustainable seven percent in early January on concerns that the government would not be able to raise funds on the market at affordable rates and eventually be forced to seek a bailout like fellow eurozone members Greece, Ireland and Portugal.
In Athens, the lead negotiators for the banks and insurers that hold much of Greece’s debt were to arrive for informal talks on a deal that Greek officials say could be reached this week.
Creditors from 32 banks, insurers and investment funds owed money by Greece and grouped within the Institute of International Finance also decided on Wednesday to send a team of experts to assist the negotiations on a writedown of Greek debt worth an expected €100 billion.
An IIF statement said that Charles Dallara and Jean Lemierre, co-chairmen of the negotiating team, would return to Athens as well “for informal discussions”.
Stocks in Athens continued to rally on heightened expectations of a debt writedown deal, with the Athex index gaining 3.93 per cent.
Greek officials are seeking an accord on a Private Sector Involvement (PSI) deal under which creditors would sign off on a 50 per cent cut on the €200 billion in debt they hold.
Talks have snagged on the amount of interest to be paid on the remaining debt.
Greece is struggling to reduce aggregate debt of at least €350 billion, the equivalent of 160 per cent of the country’s annual output.
US stocks were mixed in late morning trade.
The Dow Jones Industrial Average was up 0.30 per cent to 12,795.63 points, while the broad-based S&P 500 was off 0.06 per cent to 1,325.28 points and the tech-rich Nasdaq Composite dipped 0.10 per cent to 2,815.36 points.
Asian markets took the latest Fed rates pledge in their stride yesterday.
Hong Kong, which was returning after a three-day holiday for Lunar New Year, jumped 1.63 per cent and Seoul added 0.25 per cent, while Tokyo fell 0.39 per cent. Sydney, Shanghai, Mumbai and Taipei were closed for public holidays.