US stocks soared late yesterday after a report on New York state's manufacturing sector proved surprisingly strong and sparked hopes that the US economy will recover later this year.
Stocks have rallied for more than three months, as investors have shrugged off tepid economic data and bet on a rebound later this year.
Since hitting its low for the year on March 11th, the Standard & Poor's 500 index has climbed 25.5 per cent.
Expectations of an interest rate cut by the Federal Reserve's policy board, which meets next week, also added to the market's optimism."We're at the point where economic data, no matter what comes out between now and next Tuesday, will be viewed through rose-coloured glasses," said Mr Andrew Baker, a senior trader at Wedbush Morgan in Los Angeles.
"Weaker data can be interpreted as a higher chance of a rate cut, which is good for the market and the economy, and better economic data will signify the economy is turning around."
The Dow Jones industrial average rose 2.19 per cent, to 9,316.72, on track for its highest close since last July.
The broader Standard & Poor's 500 Index gained 22.15 points or 2.24 per cent, to 1,010.76, near a 12-month closing high.
The technology-lead Nasdaq Composite Index climbed 2.51 per cent, to 1,667.32, also its highest close since late May 2002.
The Federal Reserve Bank of New York said its Empire State Manufacturing Survey soared to its highest level in its two-year history. The report, which measures factory activity in New York state, gave a glimmer of hope for the stagnant US manufacturing sector.
Meanwhile, the euro traded within a cent of a new all-time high against the dollar yesterday, as investors once again sought to reduce their exposure to the beleaguered US currency.
The move, which saw the euro rise by half a per cent to $1.1931 in early European trading, came in response to weak consumer confidence numbers in the US last Friday, which in turn heightened the prospect of the latest in a series of rate cuts being delivered by the Federal Reserve next week.
With the return on US assets already squeezed by historically low rates, investors took fright and immediately moved into higher yielding currencies, particularly the euro and sterling.
The yield appeal of the euro was further boosted yesterday as European Central Bank (ECB)Governing Council member Mr Ernst Welteke dampened expectations that a further euro-zone rate cut was on the way.
In an interview with Deutsche Welle television station, Mr Welteke noted that the ECB had cut rates by 125 basis points in the last half year and it was not for the body to do more to revive the economy.
His comments came as Paris-based think-tank, the Organisation for Economic Co-operation and Development (OECD), said the euro-zone economy had stagnated in the first quarter.
The OECD put US growth at 0.5 per cent in the first three months, but said output had stalled at 0 per cent in the euro zone, after a slight increase of 0.1 per cent in the previous quarter.
"The yield differential is certainly causing a lot of dollar weakness," said Mr Patrick Madigan, senior FX sales dealer at Bank of Scotland (Ireland), predicting that the euro was on track to rise above $1.20 before any real dollar recovery came about.
Sterling, which yesterday rose to a four-and-a-half-year high of $1.6825 against the dollar and firmed by more than 0.5p to reach 71.08p against the euro, is also likely to strengthen further, according to Mr Madigan.
The dollar was not prepared to give up all its losses yesterday, however, managing to recover slightly in afternoon trading on the back of the positive US manufacturing data and profit taking.
By the time European markets had closed, the euro had fallen back to $1.1846.
Economists remain convinced that a test of levels above $1.20 could be in order for the euro however, possibly as soon as next week. - (Additional reporting Reuters)
