Fed move spurs stocks upwards, oil near record

LONDON (Reuters) - World equity markets rose on Wednesday in reaction to large gains on Wall Street which followed Federal Reserve-led moves to inject billions of dollars of liquidity into cash-starved credit markets.

Oil stayed close to its near-$110 a barrel record high but the dollar eased back after gaining in the previous session, as currency traders became skeptical about whether the measures could solve problems in the economy or the credit market.

Deep concerns among investors about the threat of another round of last year's credit crisis were at least temporarily assuaged when the Fed said on Tuesday it would allow financial firms to swap securities backed by home mortgages for some $200 billion in Treasury bonds.

This was supported by other liquidity-inducing efforts by the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank.

The moves spurred the S&P 500 index of leading U.S. stocks to its biggest daily gain since October 2005 with a 3.71 percent rise, a mood that continued to spill over into the rest of the world on Wednesday.

"The Fed's decision to get funds for credit markets has soothed investor sentiment," said Hwang Geum-dan, an analyst at Samsung Securities in Seoul, adding that economic fundamentals nonetheless remained grim.

Europe's FTSEurofirst 300 index was up 1.4 percent, having gained the same amount on Tuesday. Earlier, Japanese stocks rose 1.6 percent with the benchmark Nikkei rising 202.85 points to 12,861.13 and the broader TOPIX climbing 19.98 points to 1,255.13.

Despite the immediate euphoria, stressed world credit markets -- where trading in a broad range of securities including some euro zone government bonds and U.S. municipal bonds had seized up over the past week -- remain a concern to investors.

Credit Suisse, for example, said it did not believe the problems would go away. "We expect to see more hedge fund collapses, more forced sales and more extreme price movements in the near term," it said in a note.

DOLLAR, OIL DECLINE

The dollar, which has been battered by the deteriorating U.S. economy and prospects of lower U.S. interest rates, eased back towards record lows versus the euro as a pick-up in risk appetite prompted by the central bank measures petered out.

"It's a bit of a reality check. The Fed's action obviously is welcome but it doesn't really fix the economy," said Martin McMahon, FX strategist at Credit Suisse in Zurich.

The dollar fell 0.3 percent against a basket of six major currencies to 73.039, edging towards a record low of 72.462 set at the end of last week.

It also eased 0.2 percent to 103.16. The euro was up a quarter of a percent on the day at $1.5368.

Oil prices were steady after hitting a record near $110 overnight, doing little to ease concerns about the world economy. U.S. crude for April delivery was up 37 cents at

$109.12 a barrel, just below its record $109.72.

Euro zone government bonds were trying to consolidate at lower levels after a sharp sell-off the previous session.

The June Bund future was 9 ticks lower at 117.37. Two-year yields were 5.6 basis points higher at 3.383 percent, while 10-year yields were flat at 3.800 percent.