LONDON The euro hit a six-week low against the dollar and European shares rose on Wednesday after euro zone economic data undershot already weak expectations, strengthening the case for another interest rate cut.
Europe's broad FTSEurofirst 300 index of top company shares was up 0.5 percent at 1,242.54 points by midday, a level not seen since mid-2008. However, U.S. stock index futures pointed to a more mixed open on Wall Street.
"If we look at the figures from this morning, Europe is still in the doldrums but liquidity is still dominating the market and investors are hoping at least that the second half of this year will improve," said Rabobank euro zone market strategist Emile Cardon.
The euro, down roughly 2.3 percent against the dollar in May, fell 0.3 percent to a low of $1.2883 after data showed Germany's economy crept back into growth at the start of the year but not by enough to take the euro zone out of recession.
European Central Bank president Mario Draghi has said he will cut rates again if the growth outlook for the region worsens, making markets highly sensitive to each data release.
Draghi is "trying to be transparent and tell the market that any sort of weak data would give (the ECB) scope to cut again, and certainly that's the way the market is trading," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.
The euro zone has now been stuck in recession since the end of 2011, with the latest data showing the region's economy shrank 0.2 percent in the January-March quarter.
Growth should return to the 17-member currency bloc in the second half of this year, but economists see no chance it will recover strongly until at least 2015, the latest Reuters poll showed.
By contrast, a run of solid U.S. economic data has raised expectations the Federal Reserve may wind down its asset-buying effort by the end of the year, driving the dollar to a 4-1/2 year high against the yen on Wednesday of 102.63.
Against a basket of major currencies, the dollar rose 0.5 percent to 84 .DXY, a peak not seen since last summer, before Draghi pledged to do "whatever it takes" to save the euro.
Euro zone real GDP: link.reuters.com/nyh28s
Growth rates since 1999: link.reuters.com/pyh89s
World interest rates: link.reuters.com/gam87t
The Fed's easy monetary policy, a big injection of cash from the Bank of Japan into its economy and hopes for easier policies from the ECB have combined to depress yields on government bonds.
Britain's central bank chief Mervyn King suggested Britain may not need to keep adding to the flood of liquidity, offering a slightly improved outlook for the economy for the first time since the financial crisis.
But King is bowing out soon and much depends on how his successor, Canadian Mark Carney, interprets the data.
"The market is driven by one thing: the massive liquidity injected by central banks. With bond yields at such levels, equities seem to be the only interesting asset class," said Thierry Jabes, strategist at 360 Asset Managers, which has 180 million euros under management.
Liquidity in the system has driven MSCI's world equity index .MIWD00000PUS back to levels last seen in mid-2008. It was flat at 376.18 points and about 13 percent away from its all-time high set in October 2007.
In Asia, the yen weakness induced by the BOJ's action lifted Japan's Nikkei share average .N225 above the psychologically key 15,000 threshold for the first time since January 2008 as investors sought Japanese exporters.
DEBT SUPPLY SURGE
As returns shrink on safe haven government bonds, 10-year Greek bond prices surged on Wednesday after Fitch Ratings upgraded the country's sovereign credit ratings, saying reforms have reduced its risk of a euro zone exit.
However, most attention was focused on Italy getting ready to launch a new 30-year bond to follow the successful 10-year debt sale by Spain on Tuesday. It received over 10 billion euros of orders for the new bond.
Market players had expected solid appetite for the Italian bond after investors also snapped up Slovenian and Portuguese debt this month in their hunt for higher-yielding securities.
In the corporate credit market, fast food giant McDonald's (MCD.N) was preparing a 10-year euro-denominated bond in what is likely to be the busiest week for new corporate supply in over two months.
Gold was trading around three-week lows at $1,414.50 an ounce and stretching its losses into a fifth straight day.
Brent crude slipped 39 cents to $102.21 a barrel. U.S. oil fell $1.22 to $92.99, declining for a fifth straight day and matching a similar losing streak in December.
(Additional reporting by Blaise Robinson; Editing by Ruth Pitchford)