World stocks, euro recover but downgrade fears weigh

Tue Dec 13, 2011 8:39am EST
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By Richard Hubbard

LONDON (Reuters) - European stocks and the euro inched higher on Tuesday after steep selloffs, staying vulnerable to further losses on warnings by rating agencies about the euro zone's outlook following an EU summit that disappointed markets.

U.S. markets were poised to open higher on Wall Street after sharp falls on Monday with stock index futures up around 0.5 percent ahead of the latest Federal Reserve assessment of the U.S. economy.

The Fed's FOMC holds its final scheduled meeting of the year later but investors expect the U.S. central bank to hold off on offering the economy any fresh stimulus as it weighs encouraging signs on the recovery against the risks coming from Europe.

Foreign exchange traders said there was a clear bias to sell the euro on any bounce after the threat of further imminent sovereign downgrades because EU leaders had failed to come up with decisive steps to tackle the region's debt crisis.

"The only thing that would be enough to restore confidence for now would be aggressive bond buying by the ECB," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.

Europe's problems were highlighted when the European Central Bank reported it had seen demand for close to 300 billion euros -- a new 2-1/2 year high -- at its weekly handout of limit-free cash for banks unable to access open markets.

The euro hovered around $1.32, above a two-month low set in Asia of about $1.3160, and due mainly to traders covering existing short positions.

"The last blow for the euro was the announcement from the ratings agencies last night," said Niels Christensen, currency strategist at Nordea in Copenhagen.   Continued...