Shares hit two-year highs after US Fed move

US and UK shares hit two-year highs as global stock markets reacted positively to the decision by the Federal Reserve to pump $600bn (£373bn) into the US economy to try to boost its recovery.

Both the FTSE and Dow Jones indexes closed up 2%, while leading indexes in France and Germany rose sharply.

The price of oil also jumped, while the dollar fell against major currencies.

Although the Fed's move was widely expected, most analysts had predicted a lower figure of $500bn to be injected.

Weakening dollar

The FTSE 100 closed up 114 points at 5863, while the Dow gained 220 points to close at 11435.

In Paris, the Cac 40 climbed 74 points to 3,917, while Germany's Dax was up 117 points at 6,735.

Earlier, Asian shares closed higher, with Japan's Nikkei index gaining 199 points to finish at 9,359 and Hong Kong's Hang Seng rising 391 points to close at 24,536.

The price of oil also rose to its highest level since early April, with US light crude gaining $2 a barrel to $86.71. London Brent rose by $1.80 to $88.19 a barrel.

With more dollar cash in circulation and with the US government's policy of buying bonds with the $600bn putting downward pressure on interest rates, as expected the dollar weakened against major currencies.

The euro rose 2 cents against the dollar to $1.4239, while the pound also rose 2 cents to $1.6273. The dollar slipped to 80.66 yen, from 81.29 yen.
European reaction

European Central Bank president Jean-Claude Trichet refused to comment on the Fed's action at the ECB's monthly press conference.

However, he did say that he was confident the Fed still supported a strong dollar, despite reports that the second round of quantitative easing was designed to weaken the US currency, in order to make its exports more competitive.

"I have no indication that would change my trust in the fact that [Fed policymakers]... are not playing the strategy of the weak dollar," he said.

"It is in the interest of the US to have a strong dollar vis-a-vis the other floating currencies."
'On the hoof'

The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.

Rob Carnell, chief international economist at the banking group ING, said the action was unusual because the economy is in a completely different shape to how it was before.

"[During the first round of QE], you had massive financial market disruptions - really serious problems, mortgage yields and rates were shooting through the roof, no one could borrow. That's clearly not the case right now," he told BBC World Service.

"The justification for it seems to have utterly changed... It's really policy on the hoof, trying to justify it as they go along."

Source: BBC
www.bbc.co.uk