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Asian shares rose and the euro held steady on Friday after the European Central Bank signalled its resolve to defend the euro zone, raising expectations it will move quickly to tackle skyrocketing borrowing costs in countries like Spain.
Markets rallied broadly after ECB President Mario Draghi said the bank would do whatever was necessary to protect the euro zone from collapse, raising hopes for action to ease strains for highly indebted member states facing pressures to seek a bailout.
Analysts said Draghi's comments, coming ahead of the bank's policy-setting meeting next week, could signal a resumption of the ECB's sovereign bond-buying scheme known as the Securities Markets Programme which has not been used for months.
"Expectations have heightened after Draghi's remarks for the ECB to do something next week, along with an expected rate cut," said Yuji Saito, director of foreign exchange at Credit Agricole Bank in Tokyo.
"The euro, for now, is spared from being tested lower, with the U.S. also coming under pressure to do something to support its growth," he said.
The euro traded at USD 1.2277, after Draghi's comments pushed it to a two-week high of USD 1.2330 on Thursday, well above a 25-month low of USD 1.2042 hit earlier in the week. Against the yen, the euro was at 96.12 yen, well above 94.12 yen touched on Tuesday, its weakest since November 2000.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5%, and Japan's Nikkei stock average opened up 1.2%, after US and European shares rebounded sharply on Thursday.
The euro's rally against the dollar encouraged investors to buy dollar-denominated commodities such as oil, copper and gold, while easing fears about Spain's fiscal plight drove Spanish 10-year bond yields below 7%, after they hit a euro-era peak above 7.6% earlier in the week.
Yileds above 7% are widely seen as unsustainable for the government to fund itself, and led Greece, Portugal and Ireland to seek bailouts.
An easing in investor risk aversion saw lower-risk assets sold, lifting benchmark 10-year US Treasury yields up to 1.43% from a record low of 1.38% hit on Wednesday.
Market sentiment had been improving somewhat after ECB policymaker Ewald Nowotny said earlier in the week there was merit in giving Europe's permanent rescue fund a banking licence to let it tap central bank funds. Draghi and others have previously rejected that option.
The euro was further supported by expectations that the US Federal Reserve could also offer some additional stimulus at its policy meeting next week to ensure a delicate US recovery remains on track.
Thursday's data showed new US claims for jobless benefits fell last week to near a four-year low, and overall orders for long-lasting US manufactured goods rose more than expected in June. But other data has on housing and jobs markets has disappointed.
The US gross domestic product for the second quarter, due out later on Friday, likely grew at a 1.5% annual rate, putting it on track for the slowest growth since the second quarter of 2011.
"We know already the quarter was weak, so what's more important now is the forward-looking perspective," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co In New York.
"The Fed stands very little chance of achieving its goals on employment without further stimulus."
The euro's upside, however, will be capped due to uncertainty surrounding Greece's restructuring efforts as its global lenders scrutinise conditions for twice-bailed out Athens to keep receiving aid.
An easing risk aversion helped Asian credit markets recover, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by 2 basis points.
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