Risk appetite bolsters dollar, global stocks

By Toni Vorobyova

LONDON (Reuters) - Improved risk appetite bolstered equities and the dollar on Wednesday, and pushed emerging market debt spreads to their narrowest levels this year 11EMJ.

The UBS risk index showed risk appetite hitting a 10-month high thanks to decreasing currency and equity market volatility, the out-performance of stocks versus U.S. government bonds and the tightening spreads between emerging market debt and Treasuries.

"There is positive sentiment overall that started last week with some believing that the credit crisis is over and the U.S. downturn wouldn't be as bad as feared," said Beat Siegenthaler, chief strategist at TD Securities.

Europe's technology shares were cheered by forecast-beating results from Cisco Systems (CSCO.O), the largest U.S. makers of routers and switches that direct Web traffic. The construction sector was the second best performer thanks to a jump in profits at France's Lafarge (LAFP.PA), the world's biggest cement producer.

Both Cisco and Lafarge benefited from stronger demand in emerging markets.

The FTSEurofirst 300 share index rose 0.6 percent to 1,360 points .FTEU3, while the Tokyo bourse notched up a four-month closing high. U.S. equity futures, though, pointed to a subdued open on Wall Street SPc1.

"The market's mood has changed. We are past the worst, but it's too early to be fully optimistic," said Noritsugu Hirakawa, strategist at Okasan Securities.

LACKLUSTER DATA

The change in market mood has also been evident in the currency market, where the dollar has been on a recovery path since hitting a record low beyond $1.60 per euro two weeks ago.

By 6:40 a.m. EDT, the euro was down 0.6 percent at $1.5431, extending losses after an unexpected monthly fall in euro zone March retail sales.

"The lackluster...figures highlight the need for the ECB to downgrade its assessment of growth prospects for the euro zone at tomorrow's policy meeting and may revive expectations of ECB monetary easing later this year," ING said in a client note.

Rate decisions from the European Central Bank and the Bank of England are due on Thursday, with both expected to keep rates unchanged.

The price of crude oil fell 0.4 percent to $121.34, retreating from Tuesday's all-time high of $122.73 a barrel ahead of U.S. weekly inventory data due later in the session.

Oil is still up around 27 percent this year, raising worries about inflation and limiting the ability of central banks to fight a spreading economic slowdown.

Euro zone government bonds fell amid oil-induced worries about inflation and remarks from Kansas City Federal Reseve President Thomas Hoenig, who said late on Tuesday U.S. rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation

(Additional reporting by Carolyn Cohn; Editing by Ron Askew)