NEW YORK U.S. and European stocks rallied, Treasuries slipped and the dollar weakened on Tuesday on expectations a German court would not interfere with a euro zone rescue plan and that the Federal Reserve would again ease U.S. monetary conditions.
Although Moody's credit rating agency said it might have to cut its triple-A rating on U.S. government debt, an auction of U.S. three-year Treasury notes drew aggressive bids.
"The three-year note auction went exceptionally well and the demand was huge," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
The prospect of Fed easing weighed on the U.S. dollar and safe-haven Treasuries but boosted the euro, gold, oil and stocks, assets that would be likely to outperform if the economy picked up and stirred some inflation.
"Traders are positioning for monetary easing," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management LLC in Menomonee Falls, Wisconsin, with $211 billion in assets under management.
In addition, the view that the German constitutional court would approve the euro zone bailout fund helped the euro reach a four-month high versus the dollar.
"The strong dollar has helped keep U.S. inflation very low, but the Fed wants the dollar to weaken when its strength starts to hurt the U.S. economy," said Robert Robis, head of fixed income macro strategies and senior portfolio manager at ING Investment Management in Atlanta, Georgia, with $160 billion in assets under management.
The euro hit $1.2871 on Tuesday, climbing past its 200-day moving average around $1.2834 and leaving it up 0.8 percent. The euro has rallied more than 6.0 percent from its two-year low of $1.2042 in late July.
STOCKS UP, TREASURIES DOWN
U.S. and global stocks rallied and Treasury prices slipped.
"The scenario is looking very much like September 2010 when Fed Chairman Ben Bernanke signaled an easing at the Jackson Hole conference and the Fed eased in November," Robis said.
This time, the Fed is likely to ease sooner, analysts say, but the impact of the prospective easing looks similar.
"Equities rally, the Treasury curve steepens, and the dollar weakens," Robis said.
Investors expect the Fed to announce additional stimulus measures when the central bank announces its policy decision after a two-day meeting on Thursday.
On Wall Street, the Dow Jones industrial average .DJI finished up 69.07 points, or 0.52 percent, for an unofficial close of 13,323.36.
The benchmark 10-year U.S. Treasury note lost 14/32 in price, its yield rising to 1.70 percent from 1.66 percent on Monday.
The MSCI global share index .MIWD00000PUS climbed 0.4 percent to 330.39.
Markets for riskier assets have been rallying ever since European Central Bank President Mario Draghi said in late July that the ECB would do whatever it would take to preserve the European currency union. Last Thursday, Draghi pledged unlimited bond buying to contain the borrowing costs of Spain and Italy.
Another event investors are watching is a Dutch general election on Wednesday, with voters torn between bailouts for troubled euro zone economies and austerity measures locally.
Bund futures rose 6 basis points to 140.38. Lingering uncertainty about the outcome of the German constitutional court's ruling was cited for the rise.
Oil prices rose, with Brent crude futures up 0.43 percent at $115.24 per barrel. U.S. October crude pushed 63 cents higher to settle at $97.17 a barrel, back above the 200-day moving average of $96.61, a closely watched technical indicator.
Safe-haven favorite gold, helped by weakness in the dollar, was at $1,731.46 an ounce. <GOL/>
With markets anticipating monetary easing, some observers sounded a note of caution.
"The markets seem mildly complacent; I would be interested to see what would happen if suddenly the Fed failed to deliver on some of that stimulus," Jacobsen said.
(Editing by James Dalgleish and Dan Grebler)