By Marc Jones
LONDON (Reuters) - European shares rose and the euro hovered near a two-week low on Friday after the European Central Bank rekindled expectations that it could cut interest rates again.
Strong Chinese trade data also helped lift optimism about global growth prospects, boosting oil, copper and Asian shares, while the yen rose sharply after Japan's finance minister said the currency's recent drop had been overdone.
The ECB left rates at a record low 0.75 percent on Thursday but the bank's President Mario Draghi levered the door to a cut back open by saying it would monitor whether the euro's rise over recent months could push inflation below its comfort zone.
European shares were enjoying their best session of an otherwise low-key week as midday approached, on the hopes lower borrowing rates -- or at least the threat of them -- would reverse some of the 8 percent trade-weighted rise in the euro since August.
"The ECB had quite an impact on the euro-dollar and the positive Chinese data we have had has helped shares," said ABN Amro economist Aline Schuiling.
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"Draghi signalled quite clearly yesterday that with the rise in the euro, the risks to price stability are to the downside. We expect the dollar to continue to strengthen, but if that reverses then markets would price in a rate cut."
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were up 0.5, 0.6 and 0.2 percent respectively by 1100 GMT pushing the pan-European FTSEurofirst 300 up 0.5 percent, though it was still on course for its second consecutive weekly fall.
U.S. stock futures pointed to a steady start on Wall Street.
Draghi said the euro's recent surge was a sign of a return of confidence, but cautioned: "We certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned."
The comments saw the currency tumble to $1.33705, the lowest since January 25, although a modest mid-morning rebound lifted it back to $1.3404. It had earlier also hit a two-week low against sterling and a one-week low versus the yen.
The yen, the other key focus of foreign exchange markets following the push by Japan's government to ease monetary policy, rose sharply after the country's finance minister said the currency's recent drop had been overdone.
The euro fell 1.5 percent against the yen to 123.54 yen with traders reporting selling by Asian funds. The dollar shed 1 percent to hit a session low of 92.17 yen as a U.S.-based investor sold the greenback.
HAPPY CHINESE NEW YEAR
Helping to bolster strengthening global growth hopes, China said its exports grew 25 percent in January from a year ago, the strongest showing since April 2011 and well ahead of market expectations, while imports also beat forecasts, surging 28.8 percent on the year.
It lifted commodities, including copper, which ended a four day losing streak. Brent crude oil edged towards $118 per barrel.
Brent has gained over the last three weeks as positive data suggested the global economy had turned a corner, which augurs well for fuel demand, while supply worries stemming from tensions in the Middle East have also supported prices.
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan added 0.3 percent and Australian shares rallied 0.7 percent to 34-month highs. Chinese markets are closed next week for the Lunar New Year holiday, while Hong Kong will resume trading on Thursday. Despite Friday's rises, MSCI's world equity index was on course for a weekly fall of about one percent, which would be its biggest drop since November and the first weekly decline of 2013.
However, the global index is still up four percent for the year to date and is not far from its best levels since mid-2008.
"China's economic conditions are improving and the trade data confirms the continuation of a recovery trend. Not just the trade data but retail, production and investment flows clearly show that the economy bottomed out in the third quarter last year," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.
BANK REPAYMENTS
Money markets rates reversed some of their recent gains following Draghi's insistence that the ECB's policy will remain accommodative.
The central bank also said on Friday that banks will return another 5 billion euros of its crisis loans next week, suggesting the initial flood of repayments has turned into a steady trickle.
In the bond market, benchmark German Bund futures continued to push higher as Draghi's cautious tone on the euro zone's economy underpinned demand for low risk assets.
Nagging concerns about political stability in Spain and Italy were piling pressure on higher-yielding peripheral bonds to the benefit of Bunds, overshadowing an Irish bank debt deal that will cut Dublin's borrowing costs over the next decade.
"On the 10-year Spanish bonds, we could go significantly above 5.50 percent and reach the 5.60 area and it can be quite fast and on the BTP 4.70-75 area could be reached as well," BNP Paribas strategist Patrick Jacq said.
But "On a longer-term view we still expect market friendly outcomes of the political issues and the setbacks offer some opportunities to enter long positions."
Spanish 10-year yields were last at 5.42 percent while equivalent Italian yields were about 1 basis point up at 4.58 percent.
(Additional reporting by Richard Hubbard and Emelia Sithole-Matarise; editing by Philippa Fletcher)