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Risk appetite flickered back into life in financial markets on Tuesday with the dollar and European and Japanese shares rising while safe-haven bonds, the yen and gold all took a step back.
The dollar rose in thin trading to its highest since January against the yen. The euro reached a one-year low against the greenback as speculation mounted about what the ECB will do when it meets on Thursday.
With US markets closed for Labor Day, investors in Asia had been somewhat subdued, but the mood in Europe seemed brighter as markets reopened.
Britain's FTSE, Germany's DAX and France's CAC 40 opened 0.3, 0.6 and 0.4% respectively to lift the pan-regional FTSEurofirst 300 back towards a 6 1/2-year high. Even shares in Moscow edged higher after three straight days of falls.
"It is never a straight line, so it is a bit of a breather and a pause (in Ukraine-Russia tensions), but I continue to be concerned by this situation," said Benoit Anne, an emerging markets strategist at Societe Generale. "And we all wait for the ECB, of course, this week. That is a major consideration and that will probably send a bullish signal to risky assets."
Bond markets have been one of the big beneficiaries of expectations the ECB will loosen policy to revive the euro zone's flagging economy, and traders cashed in some of those before Thursday's meeting.
Dovish comments by ECB President Mario Draghi late last month led to bets the central bank is preparing to pump more liquidity into the system, possibly via purchases of government or corporate bonds, a measure known as quantitative easing (QE).
Sources from at ECB told Reuters last week new action at its meeting this Thursday was unlikely but not impossible, and the barrier to QE was still "very high".
As European trading settled after the early flurry, the euro was steady at $1.3123 after dropping as low as $1.3115 in Asia. It had held to a range of $1.3119 to 1.3146 on Monday.
JAPAN REFORMS
In Asian trading, high-flying Chinese stocks saw a third day of gains and Tokyo's Nikkei rose 1.2%, its biggest jump in almost a month. A planned cabinet reshuffle by Japanese Prime Minister Shinzo Abe helped to fuel reform hopes.
The dollar was boosted by the flagging euro and by gains in Tokyo shares that reduced demand for the safe-haven yen. The US currency rose to a seven-month high of 104.87 yen and reached a 14-month high on the heavily traded index of currencies.
"The dollar's gains are driven by actual flows, such as options-related buying. The market is also keeping an eye on the rise in equities," said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo.
With US markets preparing to reopen after the long weekend, focus was on the ISM's report on US manufacturing due later in the day, which might suggest the US is ready to phase out quantitative easing just as the ECB considers adopting it.
"This week may start to mark the biggest shift in global monetary policy since 'Abenomics' went into full steam on the appointment of Haruhiko Kuroda to head up the BOJ," equity strategists at Jefferies wrote in a note to clients.
Elsewhere, the Australian dollar showed little reaction to the widely expected decision by the Reserve Bank of Australia to keep its cash rate at a record low 2.5% for the 12th consecutive meeting. The Aussie was down 0.4% at $0.9296 after brushing a one-week low of $0.9285.
In commodities, Brent crude held steady below $103 a barrel on Tuesday, with unrest in OPEC oil producer Libya balanced by concern demand for oil will slow as economic recoveries in China and Europe weaken.
Palladium hovered near the 13 1/2-year high of $910 an ounce it reached overnight on fears that Western sanctions will curtail supply from Russia, the world's biggest producer of the metal. Spot palladium last traded at $904.50 an ounce. Gold nudged down as risk appetite recovered.
