Asian shares and the euro steadied on Thursday after bouncing from recent lows as hopes grew for more US stimulus to support growth and new European policy measures to keep the euro zone's debt crisis from deepening further, but sentiment was fragile.
The euro rose against the dollar for the first time in six days on Wednesday, while data showing new US home sales posted their biggest drop in over a year in June and prices resumed their downward trend reinforced views the Federal Reserve would consider more easing steps to underpin a delicate US recovery.
European Central Bank Governing Council member Ewald Nowotny said there are arguments for giving Europe's permanent rescue fund a banking licence, an idea that the ECB has rejected so far, but added that he was not aware of specific discussions within the ECB at this point. A banking licence would boost the fund's firepower by allowing it access to cheap ECB funding.
Risk assets plummeted over the past week as concerns intensified that Spain, the euro zone's fourth-largest economy, might need to seek a full bailout, which would threaten to deplete Europe's rescue fund just when other highly indebted states were fighting to fend off surging borrowing costs.
Borrowing costs in Spain, facing snowballing regional debts as well as a banking sector struggling to clean up bad loans, retreated slightly on Wednesday off euro-era highs and safe-haven US Treasury yields also inched up from historic lows as worries about the euro crisis eased somewhat.
"We are getting ever closer to the point where central banks will pull the trigger and ease," said Sebastian Galy, strategist at Societe General. "The outcome of this potential easing should be to stabilise sentiment."
The euro was at $1.2138, after bouncing off a 25-month low of $1.2042 hit on Tuesday to a peak on Wednesday of $1.21705. It traded at 94.75 yen, still near a low of 94.12 yen touched on Tuesday, its weakest since November 2000. The dollar held steady against the yen above 78 yen.
MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.3% after falling the last four sessions. The index hit a one-month low on Wednesday.
Japan's Nikkei opened up 0.5%, after touching a seven-week low on Wednesday.
"I think we are going to see some short-covering as the yen's rally appears to have stopped for now," said Yutaka Miura, technical analyst at Mizuho Securities.
"But given that there's still huge uncertainty over Europe and that US economic indicators and earnings are mixed, we can't expect too much upside. The Nikkei probably won't recover all of yesterday's losses," he added.
Data released on Wednesday underscored the damage the three-year debt crisis has inflicted on Europe's economic activity.
German business sentiment dropped in July for a third straight month to its lowest level in more than two years, according to the latest survey by the Munich-based Ifo think tank, while British economic output shrank much more than expected in the second quarter, official data showed.
The top 10 US prime money market funds reduced their euro zone debt holdings to 8% of their combined assets in June, the lowest level since 2006 as fears about Spain requiring a full-blown bailout intensified, Fitch Ratings said in a report on Wednesday.
A general easing in risk aversion helped to improve Asian credit markets, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by 2 basis points.
