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LONDON (Reuters) - The euro touched a one-month high against the dollar and Spanish government bond yields fell sharply on Wednesday after Spain clung on to its investment-grade debt rating.
The decision by ratings agency Moody's came as expectations grow that Spain is close to formally requesting aid from its European Union partners, potentially allowing the region's central bank to begin buying its bonds.
The euro was up 0.3 percent at $1.31, having earlier hit $1.3125, its highest level since September 17, while Spanish government 10-year bond yields dropped 24 basis points to 5.57 percent.
"It is a major surprise. I think the market was positioned for a downgrade. The only question for markets was (would it be) one notch or more," said Piet Lammens, strategist at KBC Bank.
But investors remain cautious ahead of a meeting of European leaders in Brussels on Thursday and Friday, where there is always the potential for public disagreement over the next steps to resolve the region's three-year old debt crisis.
The two-day summit, the fourth among the 27 EU leaders this year, is meant to focus on efforts to establish a single supervisor for the euro zone's banks, as well as longer-term plans for closer integration of the currency union.
However, a push by Germany for a new super-commissioner to oversee fiscal policy and the potential Spanish aid request mean there is even a chance of a separate summit of the 17 euro zone leaders after the main meeting, officials told Reuters.
"Our expectation is ... that the European summit yet again will be a disappointment, and then it (the euro) will go back down," said Callum Henderson, global head of FX research for Standard Chartered Bank.
Equity markets reacted more cautiously to the Spanish news, with investors bracing for the release of Chinese growth data on Thursday, which will shed fresh light on the slowdown in the world's second largest economy.
Stock markets around the world have gained steadily this week on signs the global economy is slowly recovering in the wake of central bank efforts to boost activity, but investors are seeking reassurance from the Chinese numbers.
The consensus forecast in a Reuters poll is for year-on-year Chinese growth to slow slightly to 7.4 percent in the third quarter, which would be its slowest rate for three years.
MSCI's world equity index was up 0.3 percent at 336.68 points, extending Tuesday's 1.2 percent gain.
In Europe the FTSE Eurofirst 300 index of top shares was flat in early trade at 1,112.91 points. Most of the region's markets showed little movement, except for Spain and Italy, where relief over Moody's decision to keep Spain's bonds at Baa3, albeit with a negative outlook, lifted the IBEX index in Madrid by 1.2 percent to 8,037 points. Italy's FTSE MIB index gained 0.4 percent.
Meanwhile, the euro's gains sent the dollar to its lowest level in a month against a basket of major currencies, with little reaction seen to the latest televised election debate between U.S. President Barack Obama and his Republican opponent Mitt Romney.
Obama aggressively challenged Romney's views on jobs, energy and Libya in their second debate on Tuesday as the Democrat tried to reclaim the momentum in a tight White House race.
The weaker greenback, which makes dollar-priced commodities more attractive for buyers holding other currencies, supported precious metals, with spot gold rising 0.3 percent to $1,752.49 an ounce.
But Brent crude oil fell on lingering worry about the global economy ahead of the data from China, a major source of demand.
Brent futures were down 33 cents at $113.67 a barrel, while the November contract, which expired on Tuesday, closed 73 cents lower at $115.07.
Additional reporting by Ana Nicolaci da Costa and; Editing by Will Waterman