European shares and the euro fell on Thursday as persistent worries about Spain and Greece combined with disappointing company earnings to undermine investors' confidence, but moves were limited by talk that central banks may be prompted into action.
Both the U.S. Federal Reserve and the European Central Bank hold policy meetings next week, heightening speculation they may act to boost the slowing world economy and consider fresh approaches to tackling the euro zone's debt problems.
The single currency, which had bounced higher on Wednesday on talk that the ECB may consider boosting the firepower of the region's new bailout fund, slipped 0.2 percent to $1.2130, above a two-year low of $1.2042 set earlier in the week.
"Every time there is a rally in the euro like there was yesterday, it should be used as an opportunity to sell into," said Richard Falkenhall, currency strategist at SEB in Stockholm.
On Wednesday the euro bounced higher after ECB Governing Council member Ewald Nowotny discussed the merits of giving the euro zone bailout fund a banking licence, which would give the fund access to unlimited cheap funds.
"While we think something like the banking license may be required to stabilize peripheral funding pressures, we believe it may take further market stress for member countries to agree (to this)," Barclays Capital analysts said in a note.
SPAIN, GREECE DOMINATE
The problems of Spain and Greece stayed at the centre of market attention. "We remain gloomy on the euro crisis," Citi economists said in a report in which they raised the likelihood of Greece leaving the euro zone in the next 12-18 months to 90 percent from a 50-75 percent chance previously.
European Commission President Jose Manuel Barroso is due to hold talks with Greek premier Antonis Samaras in Athens later, as a group of international lenders try to decide whether to keep releasing funds from a 130 billion euro bailout package or let the country go bust.
Investors are also worried about Madrid's ability to keep funding itself from the capital markets as it faces growing bills from regional governments battling rising deficits, although Nowotny's comments have eased some of the pressure on Spanish debt.
Spain's 10-year government bond yields edged down to around 7.4 percent, but remain close to their euro era highs of 7.75 percent and at levels deemed unaffordable in the long term.
German bonds were mostly steady, having gained recently on a flight of funds away from peripheral debt markets, with the 10-year Bund yielding about 1.23 percent.
EARNINGS DOWNBEAT
The Bund market was also underpinned by a lower open to European shares due to downbeat corporate earnings, which have pointed to Europe's crisis as a source of weakening orders and consumer demand.
The FTSEurofirst 300 index was down 0.1 percent at 1,016.60 in early trading after German engineering conglomerate Siemens
The world's second largest western oil firm Royal Dutch Shell
U.S. stock index futures pointed to a lower open on Wall Street on Thursday as well.
Oil prices dropped below $104 a barrel on the disappointing earnings, and as the dollar gained slightly.
The dollar index was up 0.1 percent at 83.586, near a two-year high of 84.10.
Brent crude fell 80 cents to $103.58 per barrel while U.S. crude was down 85 cents at $88.12.
However, oil prices are being supported by expectations that weak economic data in the U.S. will prompt the Federal Reserve to introduce a third round of quantitative easing (QE).
These hopes were raised after data on Wednesday showed the biggest drop in single-family home sales in a year in June.
"Despite increasing speculation that the Fed will announce a range of measures including further QE, possibly as early as August, the underlying confidence remains fragile and volatility looks set to continue," Mike McCudden, head of derivatives at Interactive Investor, said.
