World stock markets climbed and the dollar sank on Thursday after the Federal Reserve said it will buy $600 billion in government bonds in a new attempt to jump—start the faltering U.S. economy.
Oil prices approached $86 a barrel and metal prices also rose after the U.S. central bank outlined its plan, known as quantitative easing, that will involve buying $75 billion in Treasury bonds per month until the middle of next year.
The forced increase in the supply of dollars is likely to add to the U.S. currency’s weakness and it fell on Thursday against the euro and the yen. The Australian dollar, meanwhile, was firmly above $1 after flirting with that level several times in the past few weeks.
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The Fed’s announcement was good news for stocks because the increased demand for Treasury’s created by the Fed’s purchases is expected to push up bond prices and drag down interest rates, making returns on stocks more attractive. It also boosted commodities because most are traded in dollars and a weaker dollar makes them more attractive to buyers using foreign currencies.
But there are doubts about whether the Fed’s move will achieve its main objective of stimulating lending and spending, seen as key to creating jobs and resuscitating the U.S. housing market.
It was smaller than what Fed policymakers called their “shock and awe” approach to the 2008 financial crisis, when the Fed bought $1.7 trillion of securities to lower long—term interest rates.
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Some analysts warned that continued weakness in the U.S. dollar will add to global currency tensions that could lead to increased trade barriers, making the gains in stock markets a false indicator of confidence.
“I have to point out that it’s not a healthy rise, but was simply due to the weakening U.S. dollar. The second phase of the Federal Reserve’s so—called economic stimulus plan will force global currencies to fall again, which certainly raises the curtain on a war of world currencies,” said Liu Kan, an analyst at Guoyuan Securities in Shanghai.
European stocks posted big gains in early trading. Britain’s FTSE 100 advanced 1.6 percent to 5,839.89 and Germany’s DAX climbed 1.2 percent to 6,698.12. France’s CAC—40 surged 2.1 percent to 3,921.82.
Wall Street was set for modest gains. Dow futures added 31 points, or 0.3 percent, to 11,208.00 and broader S&P futures rose 3.5, or 0.3 percent, to 1,200.90.
In Asia, Japan’s benchmark Nikkei 225 stock index jumped 2.2 percent to 9,358.78 after being closed for a holiday on Wednesday and despite pressure on exporters as the dollar fell below the 81 yen level.
South Korea’s Kospi rose 0.3 percent to 1,942.50, close to a three—year closing high and Australia’s S&P/ASX 200 gained 0.5 percent to 4,745.30.
Hong Kong’s Hang Seng index climbed 1.6 percent to 24,535.63 and China’s Shanghai Composite Index closed up 1.9 percent at a seven—month high of 3,086.94.
Elsewhere, markets in Malaysia, India, Singapore and Taiwan advanced while New Zealand’s index fell.
In New York on Wednesday, the Dow Jones industrial average rose 26.41 points, or 0.2 percent, to 11,215.13, the highest close in two years after the Fed outlined its bond buying plan.
The Fed’s announcement came after American voters frustrated by persistently high unemployment and the limp housing market handed control of the House to Republicans and gave the party a bigger voice in the Senate.
The split will probably make it harder for President Barack Obama to enact any major economic initiatives and could put more pressure on the Fed to get the wobbly economy back on firmer footing.
In currencies, the dollar fell to 80.96 yen from 81.05 yen in New York late Wednesday. The euro rose to $1.4199 from $1.4122.
Benchmark crude for December delivery was up $1.13 at $85.82 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 79 cents to settle at $84.62 a barrel on Wednesday.