European shares hit 5-1/2 year high, dollar gains

LONDON - European shares hit fresh 5-1/2 year highs on Tuesday, tracking Asian shares higher as Chinese money rates eased, while the dollar got a boost from a report the Federal Reserve would again trim its bond buying next week.

Chinese shares .SSEC rebounded from six-month lows and money market rates fell after the central bank dumped more than 255 billion yuan ($42 billion) into the financial system, easing concerns another credit crunch was underway less than a month after a late December squeeze.

Investors will also be watching liquidity operations by the European Central Bank later on Tuesday to see if it acts to correct a recent sharp rise in money rates, a tightening of conditions that could retard the region's recovery.

The key ZEW indicator of German investor sentiment for January will be released at 1000 GMT.

European shares .FTEU3 hit 5-1/2 year highs, though world stocks .MIWD000000PUS were steady.

One big loser among European blue-chips was Alstom (ALSO.PA: Quote, Profile, Research, Stock Buzz), down 12 per cent after the power and transport engineering firm lowered its annual profit and cash flow targets.

US stock futures were pointing higher, with the S&P 500 up 0.27 per cent and the Dow up 0.5 per cent.

The dollar bounced to 104.68 yen and the euro edged down to $1.3532, not far from Monday's two-month trough of $1.3508, after the Wall Street Journal reported the US Federal Reserve is on track to trim its bond-buying programme for the second time in six weeks, paring back by $10 billion to $65 billion a month.

A lackluster US jobs report had not diminished the central bank's confidence in the economy, wrote Fed watcher Jon Hilsenrath. Investors suspect he has an inside line to policy makers and put a lot of weight on his opinion.

It was enough to nudge 10-year US Treasury yields up 3 basis points to 2.85 per cent, following the US market holiday on Monday. German government bond futures fell 11 ticks.

The yen was also under pressure as Japan's central bank began a two-day policy meeting at which it is expected to keep its massive quantitative easing programme unchanged.

"We do share the view that monetary policy in the US will be less accommodative and that is helping the dollar against the yen," said Manuel Oliveri, FX strategist at Credit Agricole.

"On the yen side, there is some positioning that the Bank of Japan may sound more dovish at the end of its policy meeting this week."

Attention will also be on Turkey's central bank as a crumbling currency piles pressure on for a hike in interest rates at its policy meeting on Tuesday.

The lira recovered slightly after hitting a string of recent record lows as a government corruption scandal undermined investor confidence.

In commodity markets, gold steadied at $1,249.89 an ounce, after hitting its highest level since mid-December at $1,259.85 on Monday.

Brent futures rose 60 cents to $106.95 a barrel as immediate supply worries from prolonged outages in South Sudan and Libya offset the impact of a deal aimed at ending a decade-long dispute over Iran's nuclear programme.