European shares test two-year highs, yen volatile before BOJ

Mon Jan 21, 2013 10:36am EST
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By Marc Jones

LONDON (Reuters) - European shares inched towards two-year highs on Monday, as a political attempt to break a budget impasse in the United States and expectations of aggressive Japanese stimulus bolstered the appetite for shares.

U.S. House Republican leaders said on Friday they would seek to pass a three-month extension of federal borrowing authority in the coming days to buy time for the Democrat-controlled Senate to pass a plan to shrink budget deficits.

European shares .FTEU3 were supported by the news .EU, but with no clear response from the Democrats and a thin session expected due to a market holiday in the United States, the impact on assets such as bonds and commodities was limited.

By 1500 GMT London's FTSE 100 .FTSE, Paris's CAC-40 .FCHI and Frankfurt's DAX .GDAXI were up 0.4 to 0.6 percent, leaving the pan-European FTSEurofirst 300 within touching distance of a two-year high and MSCI's world index .MIWD00000PUS steady at a 20-month high. .L.EU

Expectations that the Bank of Japan will deliver a bold monetary easing plan at the end of its two-day meeting on Tuesday also supported shares and created choppy conditions in the currency market.

According to sources familiar with the BoJ's thinking, the government of new Prime Minister Shinzo Abe and the central bank have agreed to set 2 percent inflation as a new target, supplanting a softer 1 percent 'goal'.

The yen, which has fallen 13 percent against the dollar over the last two months as the shift in Japanese policy has taken shape, touched a new 2-1/2 year low in early trading but then firmed as traders cut short positions given the BOJ has often fallen short of market expectations.

"Investors are being mindful that the moves we have seen over the course of the last month or two are just worth locking in at least until we understand how the BOJ are really going to play in the future," said Jeremy Stretch, head of currency strategy at CIBC World Markets.   Continued...

Visitors cast their shadows on the logo of the Tokyo Stock Exchange, prior to a ceremony marking the end of trading in 2012 at the Tokyo Stock Exchange in Tokyo December 28, 2012. REUTERS/Kim Kyung-Hoon