The euro hit a three-week high and global shares gained on Wednesday before a key policy statement by the US Federal Reserve, buoyed by better-than-expected corporate earnings and signs of improved sentiment in the euro zone debt market.
US equity markets are also expected to firm after technology giant Apple's surprise jump in profits was seen leading most major indexes higher.
The dollar eased to three-week lows against a range of currencies. Markets expect the Federal Reserve to restate its intention to keep rates near zero throughout 2014 and possibly hint at more easing at its latest policy meeting.
The better appetite for riskier assets contributed to weaker demand at a German auction of new 30-year bonds, where the ultra-low yielding but safe paper had become much less attractive to investors.
Germany drew bids worth less than the amount on offer at a widely-watched auction of new 32-year debt that still sold at an average yield of 2.41%, down from 2.62% at the previous sale.
"In an environment where investors are very averse in buying peripheral bonds there is still some interest in holding German bonds to hedge against that," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
But he added: "If we see a stabilisation in peripheral markets and we start to see signs of progress in Spain or the political worries in France or the Netherlands start to dissipate then the safe-haven flows can unwind very quickly."
The single currency rose to $1.3237 after the auction although political uncertainty was keeping a lid on the gains.
The front month German Bund future was around 17 ticks on the day at 140.45, having hit a session low of 140.19 after the auction results. Yields on 10-year bonds firmed two basis points to 1.66%.
UK in recession
New data showing Britain's $2.4 trillion economy had slipped back into recession served as a reminder of the wider impact of the euro zone crisis.
Gross domestic product fell 0.2% in the first quarter of 2012 after contracting by 0.3% at the end of 2011, confounding forecasts for 0.1% growth.
The downturn was the second economic contraction in Britain since the financial crisis began.
"These figures show even more disappointing underlying growth than we feared," said Alan Clarke, UK and euro zone economist at Scotiabank.
"I think we are in good company. When the euro zone figures are released in a few weeks' time, it will show that the UK has not fared worse than the likes of Germany and France."
But the weaker economic data failed to halt gains in the FTSE Eurofirst index of top European shares which was up about 0.7% to 1039.86 points.
Fed awaited
Most market attention remains focused on the release by the US Fed of its latest round of quarterly forecasts at 1800 GMT, and the comments by Chairman Ben Bernanke that will follow in a news conference scheduled for 1815 GMT.
Bernanke is expected to be peppered with questions on the chances of more easing after its current round, known as Operation Twist ends in June.
"The market will be looking for any language change on Operation Twist and on the balance of risks around the economy, especially given the disappointing US jobs report," said Paul Robson, currency strategist at RBS.
European debt markets were taking some comfort from the latest survey of the region's key financial institutions by the ECB which found banks were softening their lending rules after its injection of 1 trillion euros of cheap three-year money via so-called LTROs.
However, the survey, conducted between March 23 and April 5, found loan demand had fallen substantially and was likely to remain subdued in the second quarter, suggesting it might take some time before the cash trickles into the euro zone's faltering economy.
European Central Bank President Mario Draghi, speaking in Brussels, singled out renewed intensification of tensions in euro area sovereign debt markets and their potential spillover to the real economy as the main downside risk.
But he added that economic activity had stabilised at a low level and expected growth to be supported by foreign demand.
The ECB's survey and Draghi's comments did little to shake the return of confidence to peripheral euro zone debt markets with both Spanish and Italian government bond yields easing.
The Spanish 10-year government bond yield fell 3 basis points to 5.84%, while the Italian equivalent was down one basis points at 5.67%.
Dutch 10-year yields, which have been affected by a budget crisis that saw the coalition government collapse, were little changed on the day at 2.32%.
Corporate health
Rising hopes of better corporate performances drove the share markets after a surprisingly strong result from tech bellwether Apple and healthy numbers from the likes of Spanish bank BBVA, Swedish telecom firm Ericsson and home appliances maker Electrolux.
The MSCI world equity index was up 0.25% at 323.97 after shares in Apple, the world's most valuable technology company, shot up 8% helping to lift sentiment in Asian markets.
