Improved U.S. Outlook Boosts Global Markets

A sunnier U.S. economic outlook and news most of the country's banks passed stress tests sent global shares close to eight-month peaks on Tuesday and pushed the dollar to fresh highs as prospects of more central bank monetary policy easing dimmed.

The upsurge in risk appetite crimped demand for safe-haven government debt, with U.S. benchmark bonds falling to their lowest since late October and equivalent German paper to a two-week trough.

The dollar hit an 11-month high against the yen and a one-month peak against the Swiss franc with the euro falling to around one-month lows against sterling and the greenback.

"It may prove a temporary phase, but at present the U.S. dollar is benefiting from higher relative yields reflecting the outperformance of the U.S. economy over other major developed economies," Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ said.

After the Federal Reserve described the giant economy as "expanding moderately," compared to the 'modest" growth description used in the its January statement, many analysts took the view that a further round of asset buying by the U.S. central bank (QE3) is now less likely.

U.S. 30-year Treasury bond yields moved up to four-month highs of 3.4 percent. The key 10-year note was yielding 2.17 percent, a level not seen since late October, and compared with a yield of 1.9 percent on equivalent German government bonds.

The Fed's latest statement, which made no direct mention of policy easing, was in line with recent stances adopted by the European Central Bank and the Bank of Japan to wait to see the impact of measures already taken.

"Major central banks, including the Fed, ECB and the BoJ, have stepped off the gas pedal and we'll likely need another deterioration in economic data before additional liquidity is provided," analysts at Morgan Stanley said in a note.

U.S. BANKS PASS CAPITAL TEST

An early announcement by the Fed that most large U.S. banks, with the notable exception of Citigroup, had passed stiff capital adequacy tests, added to the positive outlook for the economy and boosted demand for equities.

The FTSE Eurofirst index of top European shares rose 0.75 percent at the open to 1,103.85, a level not seen since last July. The gains were led by financial stocks with STOXX Europe 600 bank index up over two percent to take this year's gains to over 20 percent.

The MSCI world equity index, also helped by gains in Asia, rose 0.25 percent to 334.38.

The more upbeat tone to the markets saw German government bond futures fall to their lowest level in nearly two weeks with attention on Italy's sale of up to 5 billion euros of a new three-year bond, which is expected to meet solid demand.

The gains in the dollar and a view the U.S. has large stocks of crude oil to deal with the more buoyant economy saw oil prices dip slightly.

Brent crude was down fell 14 cents to $126.04 a barrel after settling at an 11-month high of $126.22 on Tuesday. U.S. crude eased 2 cents to $106.67.

The scaling back of expectations of additional monetary easing by the Fed saw gold fall for a third day. Spot Gold slipped to $1,671.19 an ounce, down $3.56.