Asian shares rose to a two-month high and the euro firmed on Thursday after news that the International Monetary Fund was seeking to boost its resources to tackle the euro zone debt crisis helped to ease worries about Europe's funding difficulties.
Smooth debt sales by Portugal and above-estimate earnings from Wall Street powerhouse Goldman Sachs Group Inc added to the positive mood, just as investor risk-aversion had started to weaken after assets posted gains early in the new year.
Recent data has suggested the euro zone's problems have not seriously derailed global economic activity, though the continent's rapidly cooling growth is clearly weighing on Asia's export-reliant economies. US reports overnight showed factory output growing at its fastest pace in a year.
The MSCI's broadest index of Asia Pacific shares outside Japan inched up 0.5% to a two-month high, while Japan's Nikkei average rose 1%.
"News of the IMF expanding its resources to $1 trillion eases market worries about the European situation and the improving US economy may help investors shake off their risk aversion," said Hiroichi Nishi, equity general manager at SMBC Nikko Securities.
The IMF is seeking to more than double its war chest by raising $600 billion in new resources to help countries deal with the fallout of the euro zone debt crisis, but the United States and other countries are baulking, saying Europe must put up more of its own money.
US stocks jumped to their highest since July on Wednesday, with the benchmark Standard & Poor's 500 Index closing above a key resistance level of 1,300.
Goldman Sachs shares rose about 7% as its earnings exceeded analysts' expectations.
Australian employment suffered a surprise fall in December for the second straight month of losses. The data also showed full-time employment actually rose in December while the jobless rate stayed at 5.2%. The Australian dollar fell to a session low of $1.0376.
Greek test
Greece, striving to avoid bankruptcy by restructuring its debt, kept hopes alive that a deal could be struck to grant the cash-strapped country much-needed funds, although the uncertainty surrounding the negotiations remained a big risk to markets.
International creditors and the Greek government are haggling over the interest rate that Athens will offer on new bonds and its plan to enforce private investor losses.
Investors will also face more tests to their risk tolerance later on Thursday when Spain and France tap the markets with longer-dated debt offers.
So far, debt sales in the euro zone have gone off without a major hitch in the wake of Standard & Poor's mass downgrade of euro zone sovereigns last Friday.
Portugal on Wednesday managed to sell all of its planned issuance of 2.5 billion euros of treasury bills, while Germany's auction of two-year bonds drew strong demand.
Portugal is the only country in the euro zone, apart from Greece, that is rated at junk level by all the major rating agencies.
The euro steadied at $1.2856, holding above $1.2624 hit last week, its lowest since late August 2010.
"The recent euro price action indicates how vulnerable the market is to short-squeezes on the back of positive euro zone news flow," analysts at BNP Paribas wrote in a client note.
"But given that several risks lie ahead, investors are likely to view this current short squeeze as an opportunity to re-enter short euro positions," they said.
The tightness in the dollar-funding market has eased in recent days as ample funding operations from the European Central Bank removed fears of an imminent credit crunch among euro zone banks, reducing the safe-haven demand for US Treasury bills.
On Wednesday, the US Treasury sold $30 billion of one-month bills at an interest rate above zero for the first time in seven weeks.
Overall recovery in risk helped improve Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by 3 basis points.
